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Overview: Under Armour (UA) began as a one man operation in 1996 by a former University of Maryland football player. The company specializes in high performance sportswear. They use synthetic materials to create tight fitting athletic clothing that company has designed to “wick perspiration away from the skin, help regulate body temperature, enhance comfort and mobility and improve performance regardless of weather condition.” Initially the company started out making mens shirts, but has since expanded to shorts, cleats, and womens clothing. As of 2006, Under Armour has placed their product in over 12,000 different retail outlets.

Review:

The Good: Since the company’s inception in 1996, they have continued to grow at a very steady pace. Net revenues have climbed from $49.55 million in 2002 to $430.689 million in 2006. The company is also trying to capitalize off this growth and expand into the Japanese and European markets. Under Armour has also increased their women’s apparel business by 60%. Another significant venture is that they have created a line of cleats. Their primary cleat business is for football, but they have also created cleats for baseball and softball.

Under Armour has tried to make their product more visible by sponsoring different teams. Currently they are the official outfitter of the University of Maryland, University of South Carolina, and Texas Tech football programs. They are also the official outfitter of the entire Auburn University athletic program. To top this off, they are also in the midst of a 6 year deal with the NFL to be their official footwear supplier.

According to financial statements, Under Armour’s operations seem to be getting a bit more efficient. In 2004, costs of goods sold accounted for 53.5% of net revenues. In 2006, this figure had dropped to 49.9%, making them 6.7% more efficient than before. It can also be seen throughout their financial statements that they have increased numbers across the board. Not bad considering the fierce competition of the retail world.

The Bad: Looking at the numeric financials alone, it would appear that Under Armour has very limited downside. One thing that concerns me is their $81.031 million in inventories. This figure represents 18.8% of their revenue for 2006. For comparison, Nike’s inventories in 2006 accounted for 13.9% of their revenue. These figures could explain that Under Armour has yet to be able to accurately forecast the demand for their products, causing them to overproduce and be stuck with leftover inventories.

Another possible negative is the fact that the average age of their executive officers is 40.9 years old as of the 2006 financial statement. The oldest member of this group (48) is the Vice President of Human Resources. This throws up some red flags because of the lack of experience that these major decision makers have. On the other hand, having a younger executive core in a retail company could help it be more progressive and attentive to a younger audience.

Over the past few quarters the economy has been in the dumps and this always tends to affect the retail sector. With many consumers saving now instead of spending, the retail sector has been taking a hit. Since 8/10/2007, we have seen the stock drop from $66.44/share to a current price of $34.94/share (1/23/2008). Depending on the state of the economy over the next few months, this stock could continue to drop, or it could start to rebound as it has started to over the past few days.

Another negative for the company is that Dick’s Sporting Goods and the Sports Authority account for 37% of their net revenues. If one or both of these stores were to drop their agreement to sell the Under Armour product, the company could see a large drop in revenues.

Finally, the synthetic materials used in the creation of the Under Armour products are fairly dependent on petroleum to be produced. If the cost of oil continues to rise, it would cost more to create the product. This in turn would either reduce the gross margin, or it would cause the company to increase their prices and possibly discourage customers.

Opinion: I think that Under Armour is a great company that is headed in the right direction. They are a small company and are subject to a lot of competition from companies like Nike, Adidas & Reebok. They have managed to create a niche product, although they do not have any exclusive rights to the creation of it. I think that Under Armour is headed in the right direction by selling cleats. I think if they are going to succeed in the European markets they will need to sell a Soccer cleat.

I also like the direction they are headed in with their sponsorship deals, especially those with college football. It will help give the company the exposure they need. I anticipate seeing the company inking more sponsorship deals with different colleges over the next few years.

If the company can continue to expand its’ womens and youth brand it should help out their bottom line if they market it properly. Women and youth tend to make the majority of household purchase decisions, so it is important that they attract this market.

I am also happy to see that the company has started to create more looser fitting clothing. Although the skin tight shirts that they sell look really good on someone with some muscle definition, the fact is that the majority of Americans are out of shape. By creating more looser fitting clothing, they can appeal to a wider audience.

Rating:

Market Sector: Because this is a retail company, how the retail sector performs will have a fairly strong correlation on the price movements of this stock. Since the retail sector has been a bit sluggish as of late, and since Under Armour does about 2/3 of its sales in the fall and winter months, I don’t anticipate seeing stellar numbers for this upcoming quarter. Over the past few days it seems as though this stock and the market in general have bottomed out and could be facing a rebound.

Potential: The potential of this company seems to be ever increasing. They have been increasing revenues and profits at a very fast pace over the past few years and does not show any signs of slowing down. I would expect to see profits and revenues increase by less than they typically do because of the way the economy has been lately. In the long term I see this company as having a great potential.

Risk: Even though this company is 12 years old, it is still a relatively young company and probably has a few bumps along the road to hit. I would not consider this to be an ultra-risky company to invest in. Over the long term it should be a safe bet. For short-term traders the volatility of this stock as of late would make it very risky in the short term.

Conclusion: 3.8 This stock has a very large upside to it. I can’t quite rate it a 4 because it is hard to say if the stock has truly hit its’ bottom. If I had some extra cash to invest, I would definitely take a hard look at investing in this company over the next 3-5 years.

Note: As of 1/23/2008 I do not have any sort of financial investment in this company. For a current look at the stocks and options I own, click here.