With its increasing exposure to China’s expanding sports market and knack for signing up-and-coming athletes to endorsement deals, Under Armour’s (UA) explosive growth is set to continue. As a result, Under Armour stock should be bought by growth-oriented investors.
Under Armour’s exposure to China is significant and growing rapidly. Before this month the company had 75 stores in the Asian country, and implemented plans to open “roughly a store a day” in China this month, as the company’s CEO Kevin Plank told Bloomberg recently.
But isn’t high exposure to China a bad thing for Under Armour stock? Actually, for consumer discretionary companies like UA, it’s a still a good thing.
China Retails Sales Remain Strong
Apple (AAPL) and Starbucks (SBUX) have both claimed strong China sales over the summer. And The Wall Street Journal reported that retail sales in the country surged a robust 10.5% year-over-year in July. Although that marked a deceleration from July 2014, when retail sales jumped 12.2% year-over-year, double digit percentage growth is still very impressive.
Moreover, the Chinese government is looking to stimulate the growth of the sports industry in the country, which bodes well for Under Armour’s outlook in the Asian nation.
Beijing hopes to lift the value of China’s sports business to five trillion yuan in 2025, up from just 200 billion yuan as of early this year. China’s sports businesses are worth just $32 billion, about 10% of the value of America’s sports industries, according to Want China Times. The wide discrepancy suggests that China’s sports sector has a great deal of room for growth. And analysts expect “the next ten years will be a golden decade for China’s sports industry.”
China’s government is streamlining the approval process for sporting events, and is “providing incentives” for companies in the sector, according to China’s CCTV.
UA obviously has tremendous growth opportunities in the Chinese market.
Under Armour Headhunting
On the endorsement front, UA has proven to have an amazing eye for athletic talent. In recent years, it has signed several endorsement deals with little known athletes who later became among the biggest stars in their sports.
For example, it signed 2015 NBA MVP Stephen Curry to an endorsement contract in 2013, when he was not very well-known. Then Under Armour snagged up young pro golfer Jordan Spieth to a ten-year deal, shortly before he catapulted to super stardom by winning the Masters tournament. Further, UA also signed Major League Baseball phenoms Clayton Kershaw and Buster Posey to contracts before they became household names among baseball fans. UA’s ability to identify rising talent before they make it big means huge bang for its endorsement dollars.
Under Armour’s shrewd endorsement deals have helped it overtake Adidas (ADDYY) for the No. 2 spot in the U.S. sports apparel and footwear market, boosting Under Armour stock in the process. And UA still has a great deal of room to grow in the market, as it generated revenue of $2.8 billion in the U.S. in its last full fiscal year, versus $13.7 billion for Nike (NKE).
More recently, on Sept. 16 UA pleased investors by raising its long-term net revenue growth estimate to 25% from 22%. The company now expects its revenue to reach $7.5 billion in 2018, and predicts that its operating income will grow at a compound annual growth rate of 23%, driven by growth in its international footwear, global direct to consumer, and connected fitness businesses. In a statement released in tandem with the updated guidance, Under Armour CEO Kevin Plank said:
“Building off of the incredible consumer demand we are experiencing for the brand, we firmly believe we are just getting started in our pursuit to become not only the definitive performance sports brand, but a truly great global brand.”
Under Armour stock reacted positively to the news, reaching a new 52-week high of $105.89 on Thursday. UA stock did lose 2% during the market downturn on Friday, but Under Armour stock still appears to have momentum on its side.
Although UA stock is trading at an elevated forward price to earnings ratio of 71, its high-growth rate and huge growth potential make the shares attractive. Investors should buy Under Armour stock to take advantage of one of the best positioned names in the apparel sector.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities
