Under Armour May Be Overstretched

Why the sports apparel maker is one of the biggest shorts on the Street

It's no wonder Under Armour (UA ) is nicknamed "the next Nike (NKE )." Since going public in November, 2005, the sports apparel maker has captured the hearts (and dollars) of consumers and investors. Shares have more than quadrupled from the offering price of 13. Net income nearly doubled in 2006, to $39 million, on sales of $430 million.

But not everyone is a fan of the Baltimore company, which outfits the National Football League, the University of Maryland football team, and other top athletes in its high-tech performance gear. Hedge funds and others are betting the stock is headed for a fall: Some 7.1 million shares, or 25% of those available to the public, have been sold short, making it one of the biggest shorts on Wall Street.

The big worry is whether the company can keep growing at such a fast clip. Management, which declined to comment, figures it will continue to boost earnings at a brisk 20% to 25% a year. But skeptics think the company's aggressive expansion plans and rich valuations make the stock vulnerable.

The company has made its fortune by exploiting the niches largely overlooked by the biggest names in sports stuff, a strategy that helped propel it to BusinessWeek's Hot Growth list of America's 100 fastest-growing companies in 2006. When founder and CEO Kevin A. Plank started the business 11 years ago, he targeted professional athletes and serious fitness buffs, with a line of tight-fitting T-shirts made of a special material designed to keep active participants cool and dry during workouts and games. Under Armour now uses so-called synthetic compression fabric in everything from running suits to yoga pants, a clothing franchise it's expanding overseas. Today the company commands a 75% share of the $500 million performance apparel market, one of the fastest-growing and most profitable segments in sporting goods. "They have achieved great success without having to seek out [big-name] professional endorsements, which cost a fortune," says Marie Driscoll, an analyst at Standard & Poor's. "The word of mouth is phenomenal."

Building off that brand recognition, Under Armour made its first foray into footwear in June, 2006, with cleats for football players, capturing 20% of the market in its first season. It followed with similar products for softball and baseball at the end of last year. Now management wants to push further afield. It plans to introduce a sports sneaker, like a running or cross-training shoe, by this fall or early 2008. Plank recently told investors he was preparing for such a launch by opening a manufacturing facility in China and beefing up its design and sourcing staff to increase its expertise outside of cleats.


But moving into those areas means Under Armour will go head to head with the big boys, a major departure from its original blueprint for growth. The more mainstream footwear categories, unlike cleats, are already crowded with the likes of Nike (NKE ), New Balance, and Adidas, among others. Those players will probably defend their turf aggressively, given the money at stake. While cleats represent just 1% of the $12.3 billion athletic-footwear market, running shoes alone make up 40%. "They did extremely well in athletic-performance apparel because they were the first to market," says John Shanley, a retail analyst at Susquehanna Financial Group. "It's a different story with footwear."

Meanwhile, the competition is only heating up in Under Armour's mainstay, performance apparel. Starting in 2005, Nike launched a full frontal attack on Under Armour's stronghold. Morningstar Inc. stock analyst Brady Lemos estimates the behemoth spent $30 million that year alone to aggressively promote its line of pro-quality gear.

The stock's high price only ups the ante for the company. At a recent 51, Under Armour sells for 65 times trailing earnings. That compares with the industry average of 19.5, which is about where Nike trades. Even during Nike's headiest growth days in the 1980s, it never traded hands for more than 25 times earnings. "[The high p-e] is causing some anxiety among investors," says Shanley. "Under Armour can't afford a misstep."

By Stanley Holmes

    Before it's here, it's on the Bloomberg Terminal.