Canaccord Genuity "Striking while the iron is white hot" at Under Armour

It has been a few years since I regularly shared some of the more interesting equity research reports I see each day. I know it’s not a tech stock, but Under Armour (UA:NYSE) is grabbing everyone’s attention right now, and for good reason.

Sure, the share price chart is almost straight up and to the left. UA shares are up 210% over the last two years, blowing by Nike’s still impressive ~80%+ performance and the S&P’s ~20% gain. The Baltimore-based company definitely gets credit for having the best style and fabrics right now, according to those I trust in such matters. And picking Spieth and Curry as brand ambassadors was either lucky or brilliant — and their own success must be helping raise awareness in North America. I’m just back from a couple of weeks in the U.S., and I couldn’t help but notice that UA logos were definitely outplacing Nike and Adidas on the folks I came across in the three or four states I visited — regardless of the age group of the wearer or the apparent economic snackbracket. Peter Lynch would be proud of me for noticing such things.

After beating on the most recent quarter, Canaccord Genuity’s Camilo Lyon increased his share price target. Here’s his note from this morning:

Striking while the iron is white hot; reiterate BUY, new $105 PT (from $97)

Investment Recommendation

UA’s Q2 beat (7c EPS vs. 5c consensus) showcased another quarter of impressive top line momentum, with sales growth of 29% (31% ex-FX) handily beating our 24% estimate. Once again, sales growth was broad based with footwear (+40%), international (+93%) and DTC (+33) leading the charge. Gross margin contracted by 83bps, primarily due to FX and air-freight, partially offset by robust growth from DTC and Connected Fitness.

In addition to strong innovation and an improving presentation at retail, UA is capitalizing on the excitement around its athletes (e.g. Steph Curry, Jordan Spieth, and Misty Copeland). To that end, we welcome the planned increase in marketing spend in Q3 as it will strengthen UA’s position in key growth categories like basketball, golf, and women’s. Longer term we believe this will translate into incremental revenue growth opportunities.

As we anticipated, management raised both full year revenue growth guidance to 25% (from 23%) and the low-end of EBIT range to $405-$408M (from $400-$408M). With improving execution and multiple growth drivers spread across categories, channels and geographies, our conviction in UA’s ability to reach $10B in sales over the next 5 years is further emboldened. We reiterate our BUY rating and raise our PT to $105.

Investment Highlights

• Apparel growth of 23% was driven by new introductions of strong performing styles (e.g. Armour baselayer) as well as expanded golf and hunting collections. Basketball (Curry One) and running (SpeedForm) drove 40% footwear growth. Also, 39% accessories growth was driven by new introductions in bags.

• We believe golf apparel (ameliorated by Jordan Spieth’s success), women’s training (boosted by elevated fashion styles), and incremental space allocation at wholesale (in kids/outdoor at key retailers like Academy) should continue to drive apparel growth in 2H15 (we are projecting Q3 growth of 22%). We believe new introductions in basketball (e.g. Curry One Low) and running (e.g. SpeedForm Fortis, Flow Grid, Twist and Bandit) will deliver accelerated growth in footwear (we are modeling 40% in Q3).

• UA’s investments in its footwear business (especially basketball) are paying dividends. The Curry One is driving market share gains in both DTC and wholesale, leading to increased distribution at key retail partners. We believe this will be most evident in specialty mall retailers (e.g. FL/FINL) where UA has been under-penetrated/represented historically, mainly due to lack of compelling product. Now with the success of Steph Curry, UA will smartly leverage this partnership to drive further gains in the category via exciting new product launches. Initiatives like the recent partnership with FL’s Champs Sports to establish shop-in-shops called “The ARMOURY” should further accelerate UA’s share gains while also boosting comps for FL.

Valuation

Our $105 target is based on a blend of 60x our 2016E EPS, 30x EV/EBITDA, and DCF.

MRM
(disclosure: we own UA in our household)