Under Armour (UA 17.00%) delivered a truly spectacular earnings report for the fourth quarter of 2013. The company is clearly firing on all cylinders and positioned for growth, but it's also trading at a considerable premium to industry peers such as Nike (NKE 0.08%) and lululemon athletica (LULU 0.96%). Should you buy Under Armour, or is the best part over for the company?
Playing to win
Under Armour's performance during the last quarter of 2013 was nothing short of impressive; revenues during the period jumped by 35% to $683 million. Performance was strong across the board: Apparel revenues increased 35%, footwear sales grew 24%, and accessories sales increased by 52% versus the same quarter in 2012. In addition, Under Armour is actively growing its direct-to-consumer channel, with sales increasing by 36% during the quarter and representing a big 39% of total revenues.
Gross margin increased 100 basis points to 51.3% of sales, but operating margin fell from 16.1% to 14.4% because of increased selling, general, and administrative expenses. Earnings per share during the quarter grew 27% to $0.59 per share, comfortably beating analysts' estimates of $0.53 per share.
This was Under Armour's 15th consecutive quarter of sales growth above 20%, and management is expecting another strong year in 2014. The company forecasts revenues in the range of $2.84 billion to $2.87 billion, representing a growth rate of between 22% and 23% versus 2013. Operating income is expected to be in the range of $326 million to $329 million, an increase of 23% to 24% over 2013.
Moving forward
Under Armour is positioned to continue delivering substantial growth in the years ahead. The company has signed agreements to outfit the University of Notre Dame and the United States Naval Academy in addition to expanding internationally into soccer with Colo Colo in Chile and Cruz Azul in Mexico.
The recent acquisition of MapMyFitness for $150 million provides plenty of opportunities for growth and innovation in areas like wearable computing and social fitness. Management is also quite optimistic when it comes to growth prospects in the women's segment, which is gaining momentum and surpassed the $500 million barrier in 2013.
International sales were only $37 million during the fourth quarter, a small 5% of total revenues. To put things in perspective, Nike makes more than 50% of sales from global markets, so Under Armour has enormous room for international expansion in the long term.
Valuation
Under Armour trades at a forward P/E ratio of 46.4 times earnings estimates for 2015. That is more than double the valuation the market is assigning to competitors like Nike or Lululemon, trading at forward P/E ratios of 20.9 and 20.7, respectively.
Nike is the industry leader when it comes to global reach and international brand recognition in the sports shoes and apparel business. The company is performing quite well, with global revenues increasing by 8% during the quarter ended on Nov. 30, but Under Armour is clearly outgrowing this heavyweight champion by a considerable margin.
Lululemon, on the other hand, is having a hard time trying to recover its brand image and reignite sales growth after its recent problems with product quality. Management has recently reduced sales guidance for its fiscal fourth quarter ending on Feb. 2 to between $513 million and $518 million, versus a prior range of $535 million to $540 million. Until the company can find a sustainable path to recovery, Lululemon is a much more uncertain investment proposition than Under Armour or Nike.
Bottom line
Under Armour is clearly priced for growth, but the company is proving it has what it takes to deliver outstanding performance while outgrowing competitors like Nike and Lululemon by a significant margin. The future is looking stronger than ever for the company, so Under Armour is a solid candidate for investors who are not afraid to pay a valuation premium for companies with extraordinary potential for growth.
