Back in 2005, athletic apparel company Under Armour (NYSE:UA) came public at $13 and nearly doubled on its first day of trading, but still had a whole lot more opportunity past that. This week, UA shares kept redefining its all-time highs, hitting the $60 mark just a couple months after a 2-for-1 stock split.
Under Armour’s CEO and founder, Kevin Plank, got the inspiration for his company while playing football for the University of Maryland. His concept was simple: Athletes should have clothing that could wick sweat and keep them cool. Plank cracked the code, and thus revolutionized the sportswear business. In addition to traditional athletic apparel, Under Armour has expanded into categories including kids clothing, golf, outdoor, shoes and even underwear.
Of course, after roughly 400% gains since 2009, investors wouldn’t be blamed for worrying about a potential slowdown. Should you buy Under Armour now, or will it lose its momentum? To see, let’s look at the pros and cons:
Brand: In only a decade, Under Armour has become a well-recognized name. More importantly, it is associated with quality and innovation, which means that it is easier to charge higher prices. The result is that Under Armour has been able to maintain strong margins, which currently are around 46%. The company also has been able to bring on top athletes, including Olympian Michael Phelps, and NFL stars Tom Brady and Cam Newton.
Efficiency: For a growth company, it can be easy to spend too much money. However, Under Armour has taken steps to remain disciplined, and has instituted measures to improve the supply chain. The company also has brought more functions in-house, such as the manufacturing of its accessories. All these moves should help lower overall costs.
Distribution: It’s massive. You can find Under Armour items in over 25,000 retail outlets, including large sports retail chains like Dick’s Sporting Goods (NYSE:DKS) and Foot Locker (NYSE:FL).
Balance Sheet Unpredictability: Under Armour’s revenues and profits have been unpredictable for the past few years. This is to be expected, as the company has been moving aggressively into new categories, but that still means it’s difficult for investors to get a true sense of the company’s progress. Could a slowdown in revenue be a sign of waning consumer interest, or does it merely reflect a new product in the early stages of gaining market traction?
Competition: Athletic apparel is a heavily splintered business, but the biggest names are the most recognizable — think Nike (NYSE:NKE) and Adidas (PINK:ADDYY). Nike especially is a well-known product innovator, and both (and others) have the resources to push back at UA. Also, Under Armour is picking up new competitors as it moves into other categories; one notable is Lululemon (NASDAQ:LULU), a high-end operator in the women’s athletic market.
Valuation: Not attractive, as should be expected from a high-growth company. UA’s price-to-earnings ratio of 63 is triple Nike’s.
Under Armour is a quintessential American success story. The company grew through innovation to become a dominant operator in its space, and the growth prospects still look promising. However, Under Armour isn’t flying under the radar anymore, and will need to fend off increasingly proactive competition, all while managing the complexities of moving into new categories.
But the immediate concern is that valuation, which could make Under Armour highly susceptible to a slowdown.
So should you buy Under Armour? No — at least not now; instead, investors should wait to buy the stock on a pullback.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.