It's no surprise that some investors question if Under Armour's (UAA -1.18%) stock is too expensive. With shares trading for nearly 48 times this year's projected earnings, it isn't a stretch to think the shares are expensive. By comparison, they are relatively 90% more expensive than Nike (NKE -0.45%) and 119% relatively more expensive than Lululemon Athletica (LULU -2.35%). That being said, the uninformed might not realize just how large the opportunity for Under Armour really is.

Inventory concerns have passed
A few years ago, many investors worried that Under Armour was spending too much on inventory that would take a long time to clear out. As Peter Lynch once said, one of the biggest worries when you are talking about a retailer is if the company carries too much inventory.

Retailers that carry more inventory than they need could be required to mark down unsold items, which would hurt margins and profits. If a retailer can effectively manage its operations and keep inventory in check, stronger profits and better results should follow.

One reason investors should say "I Will" to Under Armour shares is the old worry about the company carrying too much inventory seems to be a dead issue. In years past, Under Armour would routinely carry more than 100% of inventory compared to current-quarter sales.

In the company's last quarterly report, this percentage was down to about 69%. While this percentage is higher than Nike at 57%, or Lululemon at 54%, it is not worrisome. Over the last four quarters, Under Armour carried an average of 76% of inventory to current quarter sales, so the company's current level is actually below average compared to the last several quarters. In addition, Under Armour is methodically building its Under Armour Warehouse business to make sure any excess inventory is sold.

Apparel Strength 
To a novice investor, it might seem that choosing between Under Armour, Nike, and Lululemon is an exercise in what company offers the best value. However, there is a significant difference between Under Armour and Lululemon compared to Nike. Both Under Armour and Lululemon rely heavily on apparel sales. In fact, Lululemon appears to be expanding into menswear to find future growth, whereas Under Armour is attempting to expand into womenswear and yoga wear to gain new customers. Nike on the other hand, gets the majority of its sales from footwear and is split between womenswear and menswear fairly evenly.

To get an idea of how different these companies are, look at the composition of their apparel sales.


Percentage of Apparel Sales

Annual Sales Growth


near 100%





Under Armour



(Source: SEC Filings)

As you can see, both Lululemon and Under Armour get a large portion of their sales from apparel, while Nike is focused more on footwear (56% of sales). The fact that Lululemon and Under Armour also are growing much faster has to do with their size but also the cyclicality of apparel compared to footwear sales. While Nike is expected to generate sales north of $27 billion for the full year, Under Armour is expected to generate sales roughly one-tenth this size. To put this another way, though Under Armour stock sells for a forward P/E ratio that is 90% more expensive than Nike, the company could grow sales by 20% a year for the next 12-13 years before the company would even match Nike's total sales.

With analysts calling for roughly a 22% annual increase in Under Armour's earnings in the next five years, by 2019 the company might report EPS of as much as almost $5 a share. By comparison, Nike's slower expected EPS growth rate of around 12% would generate about $5 in annual EPS by 2019. Given that there is a roughly $8 difference between the two companies share prices, if Under Armour can capitalize on its opportunities, it certainly seems over the long term, of the two companies, this would be the stock to own.

The second reason to consider buying Under Armour is the company's strength in apparel sales. Under Armour benefits from a higher percentage of apparel sales because customers replace and buy apparel on a much more frequent basis than footwear. While many customers buy a new piece of clothing every week or at least a few times a month, buying footwear is different.

Runners generally believe they should get about 400-600 miles out of a running shoe. If a runner does five miles a day, five days a week, one pair of shoes might last as long as four to six months.

With a faster purchase cycle for clothing compared to shoes, Under Armour and Lululemon can grow their sales faster because of the frequency of customer purchases.

Growth with a major kick
The third reason investors should say "I Will" to Under Armour shares is the company has a huge opportunity in its footwear business. Nike generated more than $3 billion in sales from footwear in the last quarter, whereas Under Armour generated about $80 million. In the U.S. alone annual spending on footwear is estimated to be more than $20 billion.

Given that Under Armour's footwear division sales are less than 3% of Nike's total, and less than a half a percent of total U.S. annual footwear spending, the opportunity is indeed vast. Even if Under Armour were just to continue growing its footwear sales faster than its apparel sales, this division represents a big reason that Under Armour can post impressive growth for many years to come.

With better inventory management, strong apparel sales, and a huge opportunity in footwear, Under Armour is only expensive if the company doesn't capitalize on its chances. Should investors buy Under Armour's stock given its potential? I don't know about you, but "I Will."