Buy – Under Armour

In recent years, UA has amassed what it thinks is the largest digital health and fitness community in the world — with well over 120 million unique global consumers — largely through acquisitions. In February 2015, the company acquired MyFitnessPal, a provider of health and fitness apps with over 80 million registered users, for $475 million. In January of 2015, it acquired Endomondo, a digital health platform based in Copenhagen, Denmark, for $85 million. In December 2013, the company acquired MapMyFitness, Inc., a digital connected fitness platform with a community of over 20 million registered users, for about $150 million.

MARKET PROFILE. Synthetic performance apparel represents about a $3 billion market, and we think UA is the leader with an estimated 60% share. With the addition of cotton performance apparel to its product line in 2011, the company expanded its addressable market to include the $12 billion “active use” sports apparel market. Over time, we expect UA to compete in the even broader $58 billion activewear market, which consists of not only performance sports apparel, but also casual or informal wear. Demographic trends of increased consumer awareness and participation in active lifestyles have propelled interest in the active use sports apparel market, where the perceived benefits of moisture management (wicking) and technologically advanced performance products are thought to lead to improved athletic performance. For businesses, this translates into higher average price points, and, correspondingly, higher gross margin dollars. The sporting goods industry is generally thought to be more recession-resistant than many consumer discretionary categories, based on its lifestyle component and relatively low cost basis.

PRIMARY BUSINESS DYNAMICS. About 16 years ago, UA virtually invented compression (tight-fitting) apparel for serious athletes to regulate body temperature by wicking away perspiration and thus enhance comfort, mobility and performance. Today, the company markets three synthetic performance apparel gearlines, each engineered for use in specific weather conditions: HeatGear for warm to hot weather, ColdGear for cold weather, and AllSeasonGear for changing temperatures. UA’s brand identity is derived by a combination of on-field authenticity with professional, collegiate and Olympic athletes and teams that use its brand and marketing, and by brand-building activities that position Under Armour as an authentic lifestyle brand with the broader consumer market of active lifestyle consumers, where we think it is beginning to make inroads. Marketing represented 10.5% of the company’s 2015 revenues.

UA’s penetration of the active use sports apparel market is being supported by investments in its directto-consumer business (e-commerce, catalogs, less than two dozen retail stores, and 143 factory outlet stores in North America at the end of 2015), expansion of domestic and international wholesale distribution, and product adjacencies. In the fall of 2006, UA introduced a line of football cleats, a natural product line extension, in our view, given the brand’s on-the-field authenticity with football players. Softball cleats followed with a spring 2007 launch. UA’s footwear offerings have since expanded to include performance training, running and basketball shoes. The company’s accessories include baseball batting, football, golf and running gloves incorporating HeadGear and ColdGear technologies, as well as socks, mouth guards and eyewear developed by licensees.

CORPORATE GOVERNANCE. UA was founded in 1996 by CEO Kevin Plank, who is also ther chairman of a 10-person board of directors. The company has three classes of shares: A, B and C. As of December 31, 2015, Mr. Plank holds a 15.9% equity stake and 65.3% of the voting power through his predominant ownership of the supervoting class B shares. In April 2016, the company issued a stock dividend on a onefor-one basis for all class A and B holders (via a new class C non-voting common stock).

FINANCIAL TRENDS. In the five years through 2015, the compound annual growth rate (CAGR) for revenue was 30%, for gross profits 29% and for EBIT 30%. Over the past few years, margins have been pressured by the clearance of excess product through the company’s outlet stores, growth in footwear sales (which carry lower margins than apparel), incremental airfreight to meet customer demand and, most recently, costs related to launching a digital health community through some notable acquisitions. We project a three-year EPS CAGR of 24%, and see improved earnings growth in tandem with retail expansion and supply chain improvements. The company had a capital budget of $280 million to $290 million for 2015, up significantly versus $145 million in 2014.

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Agarwood Capital

AgarWood Capital is an investment firm built on fundamental research that invests in value-growth equity securities. We filter out the market noise to identify undervalued opportunities, isolate quantifiable data, and then implement ideas. Our focus is research-driven with practical insights powered by academic and market research that invest in tailwind businesses.

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