Under Armour (UAA -0.59%) is a Baltimore-based manufacturer of moisture-wicking fabrics that are used in specialty sports apparel. The company's shares are currently trading at all-time highs and are much than those of peers lululemon athletica(LULU -2.59%), Nike (NKE -2.28%), and Columbia Sportswear. The lofty valuation has investors worried it's not justified and concerned about how primed for growth Under Armour is. 

Whereas there is no denying that Under Armour shares are indeed pricey compared to the company's counterparts in the space, Under Armour certainly has great runways for growth ahead of it. The company's synthetic performance apparel division is by far its most important and contributes roughly three-quarters to its top line. The division's revenue has grown at a blistering 20% for 16 straight quarters. Under Armour has been able to cut itself a big niche in performance apparel, where its products command top dollar. The synthetic performance apparel market is estimated to be worth about $3 billion, of which Under Armour holds 70% market share.

Since Under Armour already owns a huge percentage of the market, its scope to gain more market share is limited, and its top-line growth hinges strongly on the pace at which the overall market grows. Let's now look and see whether the company can sustain its wild growth in the coming quarters and years.

Wild holiday growth
Under Armour was one of the very few sports-apparel companies that was able to celebrate holiday sales. The specialty sports apparel maker recorded solid 34% top-line growth over the holidays and completely outclassed rivals Nike and Adidas. Its fleece line was center stage and helped to drive this growth. Under Armour had ramped up its holiday promotions much more this time than it usually does. For instance, the company ran a popular advertising campaign around its new ColdGear Infrared technology.

In comparison, Nike only managed to chalk up 12% top-line growth in holiday sales. Its sales lagged because of a shorter holiday season since Thanksgiving fell a week later in 2013. Nike has a wide range of products and deals designed exclusively for the holiday season. Its prices are usually heavily reduced during the holiday season, and this could put its gross margin under some pressure.

Under Armour, Lululemon, and Nike have the following top and bottom-line growth projections for fiscal 2014.




Under Armour

Revenue Growth 2014




EPS Growth 2014




In the next few years, Under Armour expects most of its growth to come from the following segments:

Under Armour has a strong presence in the sports-apparel industry but is sorely underrepresented in the sports footwear sector. It holds a paltry 2.7% share of the market compared to Nike's industry-leading 47% (or as much as 60% when you factor in Jordan and Converse brands) position. Luckily for Under Armour, the footwear market is highly fragmented, and the company can try and leverage its strong brand loyalty to grow its market share here. The company aims to grow its footwear division revenue from the current $290 million per year to about $600 million by 2016.

The gross margin for sports footwear tends to be 30% lower than for other sports categories. Under Armour, therefore, must rely on careful brand positioning to enable the company to roll out higher-margin shoes in the medium- and high-price ranges. Toward this end, the company has already recruited several NBA stars to endorse its products.

International expansion
Under Armour's international revenue currently makes up just 6% of its overall revenue. The company is, however, working feverishly to change this.

It recently revealed during its investor day that it intends to grow its international sales to 12% of overall sales by 2016. It intends to achieve this through increased online sales, elevated average selling prices, higher store counts, and increased 'shops within shops.'

Laser focus on women and youth
Under Armour's women's business growth has in the past outpaced overall company growth. The sector currently contributes 30% of the company's revenue, a sharp rise from just 18% three years ago. Under Armour projects that its women's division will soon eclipse the men's division and has been launching new marketing initiatives that are specifically targeted toward women.

Under Armour also sees ample room for growth in the youth sector. The company plans to grow revenue in this division from the current $220 million to $470 million by 2016. The youth business is showing strong growth in both apparel and shoe sales, which proves that Under Armour is making strong connections with this rather fickle demographic. This bodes well for the company's future growth.

Potential headwinds
Under Armour faces several headwinds, as I pointed out in this article. The company has no product patents of its own, and faces higher cotton prices as well as stiffer competition from bigger rivals such as Nike and Adidas, which now use some of the novel technologies Under Armour uses in their own products.

Even for a high-growth company like Under Armour, the stratospheric valuation is a bit worrying. In the event that the company's growth slows a bit, investors may exit in droves leading to huge price plunges. To protect yourself from any sudden and huge downturn in Under Armour shares, you can include mature stocks such as Nike in your portfolio. Nike shares offer you a good safety valve since they are very fairly priced. Also, Nike has been growing at a very healthy pace despite being a mature company with much higher revenue than either Under Armour or Lululemon.

Lululemon shares have tanked massively ever since the company lowered its growth guidance. With a valuation similar to Nike's (forward P/E ratio of 25.14 vs. Nike's 25.15)  but double the growth (see chart above), the shares look like good candidates for the bargain bag; at least for bold contrarian investors willing to look past the negative rap currently surrounding the company. After all, companies such as Chipotle and Netflix were once in Lululemon's shoes just a few years ago, yet with sound management have been able to pull off amazing comebacks.

Bottom line
Under Armour is a great growth stock. However, investors should include good value stocks such as Nike in their portfolio to offer a measure of downside protection in case the shares suddenly decline.