Athletic apparel and footwear maker Under Armour (UAA 0.92%) has grown at an insane rate over the past five years:
UA Revenue (TTM) data by YCharts.
We're talking 21 consecutive quarters of 20%-plus sales growth, people. What started out as a small apparel company targeting high-performance male athletes is quickly becoming a force to be reckoned with in multiple categories, including footwear across multiple sports, apparel for men and women, and a fast-growing international presence.
Guess what? Under Armour's management is raising the stakes. Co-founder and CEO Kevin Plank announced that the company is now planning to reach $7.5 billion in sales by 2018 -- less than three years from now. As fellow Fool Steve Symington pointed out recently, that's more than 140% higher than the $3.1 billion in sales the company recorded in 2014 and basically double 2015's guidance.
With the company set to report earnings on October 22, now's a great time to talk about four key things the company must continue to execute on if it's going to reach the incredibly high bar of performance management has set. Let's take a closer look.
1. International sales growth
Last quarter, Under Armour nearly doubled its international sales, a remarkable feat. But considering how small a part of the pie its non-North American sales are today (only 11% of sales last quarter), the company must continue to execute on its strategy of growth around the world.
These two slides from Under Armour's recent investor day sum up management's goals for growing international sales in the next few years:
Data source: Under Armour presentation.
And here's where the company wants to be by 2018:
Data source: Under Armour presentation.
The presentation (click here for PDF) outlines the specifics by region and country, showing how management is taking a methodical approach to expanding in specific regions in coming years. This is simply the global retail strategy, not including the company's efforts to grow its e-commerce business, which will include dozens of international websites in key foreign markets.
For some context, Nike (NKE 0.95%) currently generates more than half of its sales outside North America, and also does about 10 times the revenue of Under Armour. So there's plenty of room to grow this part of Under Armour's business.
2. Footwear
Shoes have been a very exciting business for Under Armour, growing about 40% last year, but is still a relatively small category, comprising about 15% of sales in 2014. To go back to the Nike comparison, Under Armour made about 30 million shoes last year, compared to more than 500 million for Nike. Nike also derives more than 60% of revenue from shoe sales.
In other words, Under Armour's shoe business is small potatoes compared to the big players, but with huge potential.
Under Armour's strategy around footwear starts with great products, but the company has had some major sponsorship wins, including top athletes like Stephen Curry, Tom Brady, and many others, helping raise brand awareness and the company's association with elite athletes.
Simply put, its footwear segment has strong momentum, and the brand awareness has probably never been higher. Under Armour has to take advantage of that to keep up the growth.
3. Apparel (and a new apparel category)
Not only is high-performance apparel Under Armour's legacy, but it remains its core business. However, that core business has evolved significantly over the past 15 years. The company's original "charged cotton" t-shirt and other compression-fit clothing once made up the entire business, but now accounts for 15% of sales.
Brianna Cope. Image source: Under Armour.
At the same time, management has built a women's apparel business from the ground up that now accounts for about one-third of total apparel sales, and is larger than the entire Under Armour business was a decade ago. Much like footwear, the company has grown this business by starting with great performing and innovative products, and then used innovative marketing to increase awareness. The company has sponsored traditional athletes like U.S. soccer star Kelley O'Hara, but also non-traditional ones such as surfer Brianna Cope, supermodel Gisele Bündchen, and ballerina Misty Copeland.
And starting next year, Under Armour is stepping yet again into a new apparel category: sportswear. While it won't impact revenue until 2016, it's important to note this new exciting revenue source. The company estimates that the top two competitors in its business, meaning Nike and Adidas, will generate over $12 billion in sales from the sportswear category in 2015.
Data source: Under Armour presentation.
4. Connected fitness and e-commerce
Under Armour has made a major push in connected fitness, investing more than $700 million to acquire multiple fitness apps over the past several years. While these investments won't necessarily generate significant direct revenues over the next few years, management is convinced that the company will significantly benefit from being a provider of these connected services. Athletes can track their workouts and performance, share their performance on social media, and interact with other athletes.
But that's just the beginning:
Data source: Under Armour presentation.
Under Armour has plans to expand its connected fitness, including devices and more services in the next year. Looking out a few years, it's pretty clear that -- this is something CEO Kevin Plank has talked about before -- Under Armour is investing in the next innovation of connected fitness: true wearables.
So far the company is seeing a direct correlation to better sales results from connected customers. Orders from connected fitness customers are more than 25% higher than the average order, and they spent nearly 30% more over the past year. Whether these customers were predisposed to spending more is almost irrelevant; Under Armour's ability to establish relationships with these customers is the key.
Looking ahead
Under Armour is investing a lot of money to fund these key growth categories. If you've watched earnings over the past few years, you'll have noticed that revenue has grown faster than profits, and that's likely to be the case this quarter and over the next several years.
However, that's largely by design, as the company spends on product development, physical expansion of its retail footprint, and marketing. Eventually, investors will want to see profits grow at a higher rate, but this is a long game -- a marathon, if you will. For now, it probably makes a lot of sense for the company to keep investing in the business. After all, Under Armour is still a small player in global athletic apparel and footwear, despite years of stellar growth.
