Under Armour's shares shot up by 21 percent on Thursday after reporting earnings that crushed low expectations, despite unfavorable weather and an industry-wide slowdown in clothing sales. Analysts had recently downgraded the stock, which is heavily shorted (short interest rose to its highest point this January since April 2013, according to Bloomberg and Markit data).
Under Armour posted a 22 percent jump in apparel sales and nearly doubled footwear sales from a year ago -- albeit from a low base. CEO Kevin Plank talked smack to naysayers who believe Under Armour's growth prospects are slowing.
Investors should listen to him.
Sure, there is short-term pain ahead: Under Armour's stock -- while trading at more realistic levels after recent poor performance -- is still expensive compared with its peers: At around 62 times forward earnings, it's trading at more than double Nike's multiple and well above the industry average multiple of 17 times forward earnings.
There are real problems at key retailers where Under Armour makes about two-thirds of its revenue: Sports Authority -- where Under Armour gets 8 percent of its sales, according to Bloomberg supply chain data -- is struggling to avoid bankruptcy. Macy's, where Under Armour gets about 2 percent of sales, is closing stores. As Under Armour used heavy discounts to move holiday goods, its gross margin fell to 48 percent from 50 percent a year before. And its inventory spiked by 46 percent from a year before.
Despite proclaiming that it only discounts its goods at its own stores, plenty of Under Armour gear popped up at off-price stores such as TJ Maxx during the holiday period. That could threaten Under Armour's reputation as a premium brand.
Still, Under Armour has room to grow.
First off, its footwear business is still pretty puny when compared with Nike's and its own apparel business. Runaway success in its Stephen Curry basketball shoes and Jordan Spieth golf shoes bode well for its prospects. It recently added a women's footwear design team and said Thursday it's committed to growing its women's business (an area Nike has struggled to crack) to be at least as big as its men's business. It could also stand to raise its prices: On average, Under Armour shoes are about 20 percent cheaper than Nike's, according to recent Morgan Stanley research citing SportScan data.
What's more, Baltimore-based Under Armour generates 12 percent of its sales from outside North America, compared to 57 percent at Nike. Even in North America, Under Armour said it sells its products through only 11,000 locations, compared to 24,000 at Nike.
Under Armour also has an opportunity to grow where Nike has had a harder time gaining traction: Connecting with consumers directly, rather than operating primarily as a manufacturer of shirts and shoes.
Right now, Under Armour gets about two-third of its revenue from wholesale accounts such as Macy's and Dick Sporting Goods. That compares to about 75 percent at Nike. Under Armour said it would open another 200 physical retail stores this year, up from 160 in 2015. Right now, it has just under 400 stores, 150 of which are in North America. The majority of those are factory stores used to sell clearance goods. Nike has more than 300 stores in the U.S. and 600 stores outside the country, about 100 of which are full-price Nike brand stores.
At first glance, the thought of opening physical retail stores seems absolutely nuts -- particularly in the U.S., where mall traffic is declining and many retailers are shuttering locations. But there are about 300 top-tier malls in the U.S. that are actually performing quite well, according to data from real estate research firm Green Street. They could be attractive new locations for Under Armour. Nike gets a tenth of its sales through mall stores such as Foot Locker and the Finish Line, making it harder to open its own competing mall stores. In contrast, Under Armour's biggest customer is Dick's Sporting Goods, which historically has operated in strip centers located outside of malls.
Building stores outside the U.S. will help Under Armour build its brand globally, as will ramping up its e-commerce around the world. Under Armour has already cobbled together better quality digital offerings than Nike with acquisitions in its connected fitness business, where it has tripled revenues in the past year, and launched a spate of country-specific websites.
Under Armour may never fully catch up to Nike. But if it keeps its eye on the ball, it might just get close.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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