Last quarter, investors were pleased after Under Armour (NYSE:UAA) capped its 21st consecutive report achieving at least 20% revenue growth. But if the athletic-apparel specialist's latest goals are any indication, that streak won't end anytime soon.
Speaking at Under Armour's 2015 Investor Day last month, management revealed an accelerated plan to achieve net revenue of $7.5 billion by 2018. That's a 142% increase from last year's revenue of $3.1 billion, and represents growth of more than 95% over Under Armour's current 2015 guidance for revenue of $3.84 billion. At the same time, Under Armour is targeting operating income of $800 million in 2018, or nearly double the high-end of its current 2015 guidance.
But arguably most exciting for investors is that Under Armour's 2018 goal represents exactly 25% compound annual growth between now and then. This is also an acceleration from the 22% long-term growth rate Under Armour outlined at its last Investor Day in 2013, despite the fact that Under Armour is now building from a considerably larger base.
While that might sound aggressive, keep in mind that earlier this week, Nike (NYSE:NKE) -- which currently boasts a market capitalization of $107 billion, or more than five times the size of Under Armour -- just announced its own revenue target of $50 billion by the end of 2020. For Nike, that represents growth of more than 63% from last fiscal year's revenue of $30.6 billion, and means maintaining average annual-revenue growth in the high-single to low-double-digit percentage range.
If it's not broken...
This also raises the question: What changed between Under Armour's 2013 event and now to merit this acceleration?
According to Under Armour CEO Kevin Plank, not much. In fact, Plank noted that Under Armour's five growth drivers today are effectively the same as the ones the company laid out in its road show a decade ago: men's apparel, women's apparel, footwear, international, and direct to consumer.
Within Under Armour's most-recent quarterly revenue of $784 million, sales from the core apparel segment grew 23%, to $515 million; footwear climbed 40%, to $154 million; direct-to-consumer rose 33%, to comprise 32% of total sales; and international revenue skyrocketed 93% to represent just 11% of total sales.
But to put Under Armour's relative youth into perspective, note that sales of NIKE brand footwear exceeded $5.1 billion last quarter alone, and singlehandedly represented more than 60% of Nike's total revenue. Meanwhile, almost 52% of all NIKE Brand sales came from outside North America. Given Under Armour's impressive execution of its five growth drivers so far, and assuming it can sustain growth, and even partially replicate Nike's success in footwear and international sales, it's no surprise the smaller company feels comfortable accelerating its revenue ramp.
The surprising game changer
While Under Armour's core strategy largely remains the same, Under Armour CFO Brad Dickerson highlighted one key difference that enabled the acceleration: connected fitness.
Dickerson explained: "The last seven months have allowed us to further understand the opportunity around connected fitness, and it's this additional clarity around this new opportunity, coupled with sustained execution in our core business and continued evolution of our brand, that gives us confidence to accelerate our revenue CAGR."
Remember, in February, Under Armour raised plenty of eyebrows when it revealed it would spend $560 million to acquire two fitness app makers, including $85 million for Denmark-based Endomondo, and $475 million for San Francisco-based MyFitnessPal. Coupled with its existing apps and its 2013 purchase of MapMyFitness for $150 million, Under Armour enjoys the largest Connected Fitness community in the world, with more than 150 million registered users.
These users are exceedingly valuable. Under Armour naturally offers app users access to its e-commerce platforms. And according to Chief Digital Officer Robin Thurston -- who previously co-founded MapMyFitness -- the average order value originating from Under Armour's connected fitness platforms is 26% higher than those coming from other external sources. In addition, Under Armour says licensing and advertising through these apps has grown continuously since their respective acquisitions, and the same goes for revenues generated through their respective premium membership subscriptions.
All told, Under Armour anticipates that revenue generated directly through its Connected Fitness initiatives will represent a $200 million business by 2018. And while that's still less than 3% of Under Armour's 2018 goal, it also doesn't account for the continuous brand exposure Under Armour receives from users tracking their fitness activities through the apps on a daily basis. In turn, this exposure will undoubtedly result in incremental sales growth that may not be directly trackable and associated with Connected Fitness.
In the end, though, the benefits of Under Armour's Connected Fitness platforms are more than clear enough to give management confidence they'll be able to sustain outsized growth for the next several years. With that in mind, it's no surprise that Under Armour stock is trading within reach of fresh all-time highs.