Baltimore-based Under Armour, Inc. (NYSE: UA) could be the sports apparel company that is most ready to rebound, despite the recent jump in the share price of Lululemon Athletica Inc. (NASDAQ: LULU), a rival based in Vancouver, Canada.
That view follows first-quarter 2017 results in which Lululemon’s share price rose more than 12% to top the $50 mark, as the company outperformed expectations and its management voiced confidence in its future. Despite Lululemon’s turnaround from losing $6 billion in market value several years ago after selling so-called “see through yoga pants” that proved too revealing and caused its founder to make tactless comments about how the bodies and thighs of some women were too big the company’s clothes, investors may want to pass on LULU.
Bigger and better managed operators, such as Under Armour, Seattle-based Nike Inc. (NASDAQ: NKE) and Germany’s Adidas, offer investors alternatives to the up-and-down LULU. While Nike and Adidas are more of the “old” guard in the industry, Under Armour and Lulu are the newer companies.
All these companies should benefit from a global sports apparel market that is projected to produce revenue of $184.6 billion by 2020 and achieve a compound annual growth rate (CAGR) of 4.3% during 2015-2020, according to Allied Market Research. Reasons for the growth include increased health awareness, disposable income and female participation in sports.
Under Armour appears to be on the ascent again after pulling back substantially in the past year due to reduced sales growth and public criticism of CEO Kevin Plank’s acceptance of an invitation by President Trump to join the American Manufacturing Council as a business leader and advisor. Paid endorsers of Under Armour, including ballerina Misty Copeland, questioned whether they should stay aligned with the company after Plank praised Trump as a “pro-business” leader.
Under Armour’s latest numbers show why investors may be wise to buy shares in it after its recent retreat.
First off, Under Armour currently boasts a market capitalization of $8.6 billion. In comparison, LULU is at $7.3 billion now. But during the first quarter of 2017, Under Armour posted net revenue of $1,117,331, while LULU churned out net revenue of just $520,307.
Under Armour had more than double LULU’s revenue, but posted a loss for the quarter of $0.01 per share, while Lulu managed to turn a profit of $0.23 per share. However, Under Armour still had total liabilities and stockholder’s equity of $3,577,160 at the end of the first quarter, while Lulu only had $1,609,334.
Despite Under Armour not posting a profit in the first quarter, the tangible value of the company still was worth more than double that of Lululemon. A key reason Lululemon’s stock is back above the $50 mark is not because the company is crushing it, but because its management convinced Wall Street that it would do so in the future.
But, there are some clues that tell investors LULU may struggle to do so. First off, Lululemon sells its merchandise in its own physical locations and through its website. Under Armour has a very small number of its owns stores and actually sells the bulk of its merchandise through third party vendors, such as Dick’s Sporting Goods, Macy’s and other fashion retailers.
Over the past year, the sporting goods industry has seen a number of companies file for bankruptcy, which in turn hurt Under Armour amid the related discounting of merchadise. Lululemon never seemed to experience those pains. While there can be downsides to selling your product through other vendors, there is also the opportunity for much faster, cheaper growth.
If Lululemon wants to offer its product in a new market, it needs to open a new store and pay for all the expenses that come along with it. Under Armour just needs to find a local retailer and offer them a deal that make sense for both parties.
This potential growth is what will take Under Armour from a $8.6 billion company to a potential $40 billion organization in the future because it is turning into a global brand. Lululemon may never grow to be much larger than say $15 or $20 billion because it’s overall market is smaller due to area demographics and the expenses it would experience expanding globally.
Under Armour appears to be the better long-term investments, even though its stop price took a beating in the past year. Avoid letting the short-term issues keep you away from UA’s stock.
At the time of this writing, Matt Thalman owned shares of Under Armour. Follow him on Twitter at @mthalman5513.