Under Armour (UA) CEO Kevin Plank has set some big goals, believing that UA can double revenue by 2018 to $7.5 billion.
While possible, there are a lot of things that would have to go right for UA in order to achieve this feat. And unfortunately, Under Armour stock’s upside is limited regardless of if it hits this goal or not.
Where Will UA’s Growth Come From?
During UA’s last quarter, apparel sales rose 23% to $515 million.
In comparison, Nike (NKE) created $2.3 billion in apparel sales with growth of just 5% year-over-year.
Given the fact that Nike’s global reach is far wider than UA’s, combined with the year-to-year growth that UA would have to achieve in order to double sales in three years, chances are the explosive growth that Plank expects won’t come from apparel. More than likely, apparel sales growth will decelerate, and UA hopes to find growth in team sponsorships and footwear.
For example, UA is making a hard push in college athletics, recently signing an apparel and footwear deal with the University of Wisconsin that’s worth nearly $100 million over a decade. It is also widely known that UA is pursuing the University of Texas in a deal that would be even larger, potentially north of $15 million per year.
While these deals may seem insignificant, they add up quick for apparel companies that can build a large portfolio of collegiate sponsorships. By producing the apparel for collegiate sports teams, it consequently increases the company’s presence with fans who may buy jerseys, shoes or team apparel.
Furthermore, footwear is surely a big part of Plank’s plan, just as it accounted for nearly 65% of Nike’s fiscal-first-quarter revenue. Currently, footwear accounts for less than 20% of UA’s revenue, and the only reason it is that high is because UA struck gold with its Stephen Curry shoe line, which is figured to have sold $100 million worth of shoes in the last year.
While UA has high profile endorsements with the likes of Jordan Spieth, Tom Brady and Bryce Harper, basketball endorsements is where the money lies. Last year, UA struck out when trying to sign Kevin Durant, and also witnessed Nike sign most of last year’s top five NBA draft picks — a regular occurrence.
Therefore, if Plank’s goal becomes a reality, UA must not only win big sports apparel contracts, but also make a dent in an NBA basketball endorsement market that is dominated by Nike.
On top of that, it needs to better penetrate the women’s market.
While this is all possible, UA needs perfection in order to reach its goal.
Under Armour Stock Priced for Perfection
If UA can maintain a profit margin of 6% and is successful in reaching $7.5 billion in sales by the end of 2018, it would generate net income of $450 million. Personally, I think that is a little too high.
In order for UA to grow at this level, there’s a good chance that profits will be sacrificed in order to prioritize growth. However, for the sake of argument we’ll assume that a profit margin of 6% is sustainable. If so, that means Under Armour stock trades at nearly 50 times 2018’s EPS right now.
In comparison, Nike and Skechers (SKX) trade at 25 and 20 times next year’s expected earnings, respectively. And while many don’t realize it, Skechers is actually growing faster than UA.
Therefore, given the high expectations, the fact that UA must capitalize in so many areas to achieve its goal and that the sustainability of margins are a concern due to the emphasis on sales growth, Under Armour stock is a major risk over the next few years.
When you incorporate that Under Armour stock is trading at a very high premium multiple relative to 2018’s bullish EPS expectations, there really is no reason to own Under Armour stock, as there is limited upside and a whole lot of downside if UA fails to deliver.
As of this writing, Brian Nichols owned shares of Skechers.
