Under Armour (NYSE:UAA) is planning to enter India in an effort to further bolster its rapidly growing international business. The company is in discussions with Indian online retailers and is thinking about establishing a brick-and-mortar presence. However management decides to enter the Indian market, this is a big deal for the future of Under Armour.
Perfect timing for Under Armour
Under Armour has been built into a nearly $15 billion market cap enterprise based almost entirely on North American sales. In 2013, North America was the source of 94.1% of total revenue. In 2014 that number dropped to 90.7%. CEO Kevin Plank expects the international business to make up 18% of total sales by 2018.
This is doubly impressive when considering that North American sales grew 26% year-over-year to just over $1 billion last quarter. The company still has a long way to go to catch up to Nike and its more than $15 billion of North American sales, but there may be even more opportunity abroad in markets like India.
International sales were up 70%, including "triple-digit growth across greater China". The emerging Chinese middle class has been a growth engine for a number of American consumer goods companies, and there are reasons to believe that India is the next major market.
Perfect timing for India
India has a bright future as a middle class consumer society. It is poised to become the world's most populous nation and is becoming richer every year. Under Armour would be wise to make a strong impression in the country, while consumer preferences are still being formed.
India has a population of 1.25 billion people. This number is expected to rise to 1.38 billion by 2020. This is a positive indicator, but rising population is only helpful for Under Armour if it leads to GDP growth and if more consumers are able to buy its products.
India's GDP is projected to rise from $2.18 trillion in 2015 to $3.44 trillion by 2020 as well.An increasingly wealthy society will have more discretionary income to spend on things like sneakers, athletic wear, and connected fitness apps. The country is on the precipice of a huge increase in middle class spending, which is reflected in some future projections.
There are competing reports about the future size of the Indian middle class. McKinsey put the number at 583 million by 2025, which would constitute around 41% of the total population. Ernst & Young expects the group to grow from its current ~50 million to 200 million by 2020. The report mentions an economic "sweet spot" that Egypt and Indonesia hit in 2011 and 2015, respectively, and that India is projected to enter in 2017:
But for businesses, a more useful sweet spot occurs when significant numbers begin earning the equivalent of over US$10 per day, and enter our global middle class. At this point buying habits should attract the attention of companies used to supplying the developed world's middle class markets. The sweet spot also produces a "middle class effect", where the size of the middle class is directly proportional to economic growth. Hitting the sweet-spot accelerates growth, which, in turn increases the middle class, producing a virtuous circle.
If this is an accurate prediction, then Under Armour can use 2016 to set up operations, assess the Indian market, and lay the groundwork for future success. Next year should begin a huge ramp-up where the market comes to life, grow for decades to come, and help lift Under Armour to even greater heights. I recommend taking a look at adding shares to your portfolio and enjoying a piece of that growth.
James Sullivan owns shares of Nike and Under Armour. The Motley Fool owns shares of and recommends Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
More from The Motley Fool
Why Under Armour, Avis Budget Group, and comScore Slumped Today
Find out which of these companies issued preliminary results and warned about the upcoming year.
Here's Why Under Armour Inc Stock Fell 11% Today
A recent series of analyst downgrades has caused investors to sell the athletic apparel and footwear company's stock. Again.
Why Under Armour Stock Lost 50.3% in 2017
Under Armour's growth story saw some undesirable plot twists in 2017 due to dim performance in North America.