I initially invested in Under Armour (UA 0.91%) in 2010 for the same reasons that I continue to hold shares today; the company is the dominant athletic apparel brand of the current generation.
Whether you are jogging outside, stretching in a yoga class or working out in a gym, chances are that you are wearing or will see someone else wearing athletic apparel with the UA logo on it. The reason for this is simple. The company effectively captured the "performance apparel" segment almost 20 years ago, applied it to the mass market, and has since become synonymous with it. Despite fierce competition from much larger companies like industry stalwart Nike (NKE 0.95%), Under Armour has become the go-to apparel brand for athletes across the country.
It is my belief that the company can effectively leverage its immense brand awareness among consumers to gain market share in other product segments and geographic markets. As such, the stock remains the best long-term growth opportunity that I know about.
Brand power
Any successful retail investment should begin with brand strength. In this regard, Under Armour delivers in spades. The extreme customer loyalty that the Under Armour logo commands allows the brand to sell continuously at higher price levels than similar products from the majority of competitors.
Management at Under Armour has been able to maintain the brand's popularity through various clever marketing strategies, including alliances with prominent college sports programs, a partnership with the NFL to remain the league's official Scouting Combine partner, a deal with MLB to become the league's official footwear supplier, and an increasing number of high-profile athlete endorsements.
Branching out
However, the company is no longer just about "performance apparel." Over the years, Under Armour has diversified its lineup to cater to men, women and children, and to include new product categories like footwear, underwear and accessories.
Additionally, management at Under Armour has been successful at reaching consumers directly through an increased online presence and a growing number of outlet stores.
Competition
In what I consider Under Armour's two biggest areas of growth going forward, expansion among female consumers and a solid footwear initiative, the company has two main competitors to contend with. The first is Lululemon Athletica (LULU 1.44%), which is a leader in athletic apparel for women. Lululemon has had great success branding its products toward lifestyle activities such as yoga and running, and this is most evident in the company's staggering growth in recent years. The company has increased revenue 398% and earnings per share 704% since 2008 alone. With growth projections calling for revenue growth of 21% and EPS growth of 27% next year, Lululemon remains a significant obstacle for Under Armour to overcome in order to significantly increase its presence among female consumers.
To help in his regard, management at Under Armour has embarked upon a robust advertising campaign geared toward female athletes, which includes the use of television ads and various social media platforms. The 'What's Beautiful' campaign has been backed by individual Under Armour stores that have been redesigned specifically with women in mind.
On the footwear front, the most serious competition comes from global behemoth Nike, the undisputed leader in all things sneaker-related. Just to call Under Armour a competitor to Nike with regard to footwear is a compliment. The former's sneaker sales of $81.6 million in the second quarter of 2013 pales in comparison to Nike's $1.9 billion in footwear sales during the same time period.
Nike's rich history with regard to footwear and its constantly innovative approach, particularly with regard to running/training and basketball shoes, has firmly cemented the company as the world's best sneaker brand in the minds of consumers. While it may very well be impossible for Under Armour to overtake Nike in total footwear sales, investors need to realize that even a relatively small success in footwear can have a huge impact on Under Armour.
Even if management at Under Armour could increase yearly footwear sales to just $500 million, which would be only 7.4% of Nike's total footwear segment revenue in fiscal 2013, that number would still represent more than 25% of Under Armour's total net sales in 2012. Most importantly, the tremendous revenue Nike generates from footwear indicates just how large the global market is. Considering Under Armour's relative lack of global exposure to footwear, this presents a tremendous growth opportunity for the company going forward.
To capitalize on this largely untapped growth, management at Under Armour has been aggressively hiring former management from Nike and other top competitors in addition to increasing the amount of money spent on research and development projects. While certainly not without risk, a greater allocation of capital to fund new product development is vital if Under Armour is to make significant inroads in the highly competitive footwear segment.
Final Foolish thoughts
Even considering Under Armour's impressive year-to-date run, which has shares up more than 60% since January, the company is still in the early innings of global growth, especially with regard to footwear. With tremendous brand recognition among US consumers, including a steadily expanding female demographic, management should be able to transition that success overseas in the coming years. As such, Under Armour remains my best long-term growth pick.
