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Under Armour's Bright Future

By Cole Campbell – May 2, 2013 at 7:10PM

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The Baltimore-based apparel retailer has performed well since going public in 2005. Here's why there's still room for growth.

Cole Campbell is a freshman at St. Albans School in Washington, D.C. He recently spent a day at Fool HQ learning more about the business and investing. What follows is his bullish thesis for a business he chose to study, Under Armour.

Under Armour (UAA -0.78%) has performed tremendously in the stock market since it first went public in 2005, and it looks to sustain its rapid rate of growth over the coming years. With a market cap that is roughly one-tenth of its rival Nike's, Under Armour has plenty of room to grow and increase its market share in the athletic apparel and footwear market. The company continues to innovate by introducing new products and materials, such as its recent "Alter Ego" line of shirts that have sold extremely well.

From Under Armour's beginning in selling compression shirts to wick away sweat, it has expanded its product line and innovated continuously. While a large portion of its income still comes from its original innovations, like fabrics that keep you cool when it's hot or warm when it's cold, Under Armour recently introduced a line of basketball shoes and yoga pants. The company has gained a large market share of several niches, and its CEO, Kevin Plank, has said, "We haven't made our defining product yet."

Inventory management
Although Under Armour used to have a problem with products sitting in its inventory too long before being sold, the company has recently alleviated this problem and improved its overall operational efficiency. Under Armour has opened up its own outlet stores throughout the country, which is allowing the brand to create more sales and revenue with less inventory. This additional influx of cash will continue to help its profitability.

Brand image
Under Armour is seen by many consumers as a high-end, high-quality company thanks in part to its products being priced at a premium compared to its rivals. Under Armour's situation is similar to Apple's in that it can price its products higher than competitors' and still receive a ton of customers due to a very positive brand perception and exclusivity. This allows Under Armour to have a higher profit margin than its challengers in the sportswear market.

Stock performance
Finally, Under Armour's stock has performed exceedingly well over the past several years, especially compared to its competitors Nike and Adidas. North American revenue represented 94% of the company's total sales in 2012, which shows that Under Armour has a lot of room for expansion in other markets around the world. In addition, revenues have more than doubled since 2010. Perhaps most impressive, Under Armour has managed to maintain at least 20% year-over -year revenue growth for the past five years. This shows that Under Armour's business model is still in the early stages of growth, compared to single-digit growth from its competitors. In comparison, Nike's year-over-year revenue growth average for the last five years is 8%, and Adidas' is 7.4%.

While more established brands like Nike and Adidas could pose less risk to investors, their heady growth days are now in the rearview mirror. On the other hand, Under Armour's been the upstart apparel company that few believed could disrupt these entrenched players. From my perspective, this company's cut from a different cloth, and its best days could be ahead of it.

Cole Campbell does not own shares of any companies mentioned. The Motley Fool recommends Apple, Nike, and Under Armour. The Motley Fool owns shares of Apple, Nike, and Under Armour. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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