Under Armour Has a Long Runway

The stock's not cheap, but revenue just keeps growing.

Under Armour still has room to run. 

The athletic gear maker on Thursday raised its 2016 sales outlook to $5 billion from $4.95 billion after another quarter of sales growth outpaced Wall Street's expectations. Shares rose by as much as 9 percent as investors bought what Under Armour is selling -- a story about how the company is still transforming from a t-shirt seller into a global sportswear business. They're right on the ball. 

Higher and Higher

Under Armour expects its annual revenue to reach $5 billion this year

Under Armour's efforts to grow international sales and its footwear business are gaining traction. Take its line of Stephen Curry shoes. Under Armour hit the jackpot by signing the NBA superstar before he became a sensation. But it has smartly leveraged that lucky pick into a larger footwear strategy. Achieving scale as a big player in shoes is the key to winning shelf space at retailers such as Foot Locker and Dick's Sporting Goods. Curry's success has not only led to stellar sales of his basketball sneakers, but it has also expanded consumer awareness about the brand in general. Now basketball players, golfers, and runners alike consider Under Armour for their next shoe purchase. 

Under Armour is also well aware its U.S. growth will one day hit a wall and is gearing up for international expansion. Flying Curry on junkets across China and Southeast Asia helps boost brand awareness there, the company said on Thursday. It's making a big push around this summer's Olympics, as a sponsor of the U.S. women's gymnastics team and swimmer Michael Phelps. Already, sales outside of North America make up 14 percent of its revenue, up from just over 6 percent in the first quarter of 2013.

Thursday's killer earnings report was the latest rebuttal to naysayers who think the stock is overvalued -- Under Armour trades at 66 times forward earnings, compared with around 25 for both Nike and Adidas.

Shares fell earlier this month after a report from Morgan Stanley analyst Jay Sole warned an overstretched activewear market was hurting Under Armour's average selling prices and threatening the growth of its traditional clothing business, which still makes up nearly two-thirds of sales. Before Thursday's report, 69 percent of analysts surveyed by Bloomberg had changed their price targets on the company over the past month; 15 went lower, while only one went higher. 

Passing Game

69% of analysts surveyed by Bloomberg changed their price targets on Under Armour's stock

Source: Bloomberg

Sole wasn't wrong: Apparel growth at Under Armour has been slowing, especially when compared to its footwear business, where sales increased by 64 percent in the past quarter from a year earlier. The activewear market is increasingly saturated, and average selling prices are falling for athleisure staples such as women's tights and capris. 

Nice Threads

Under Armour's apparel sales growth is slowing, but it's still posting more than 20% gains each quarter

Source: Bloomberg Intelligence

That's especially true in the U.S., where weakness at department stores and now-bankrupt sports retailers such as Sports Authority drove Under Armour's inventories up by 44 percent from the year before. Inventory liquidation (as well as foreign currency effects) drove margins down to 45.9 percent, compared to 46.9 percent a year earlier. 

But Under Armour's footwear and international sales, as well as progress in its women's business, have more than made up for its U.S. activewear woes. In 2015 the company was selling only four styles of running shoes that cost more than $100. This year it will push out eight such styles, with 14 arriving in 2017. 

As CEO Kevin Plank said Thursday, the company is a much different business today than it was 6 months ago, and it will be a much different business in the next 6 months, as it expands abroad and ramps up shoe production. 

Investors shouldn't be so short-sighted. 

    This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    Shelly Banjo in New York at

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    Mark Gongloff at

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