This commentary was originally sent to Growth Seeker subscribers at 8:37 a.m. on Dec. 23.
There is no shortage of strong picks for the coming year in the Growth Seeker portfolio. If pressed to narrow it down to one company that had significant growth opportunities over the next few years with several tailwinds at its back and with shares at a compelling risk-to-reward tradeoff, it would be a tough decision. But we chose Under Armour (UA) after reviewing its strong prospects as it attacks the athletic footwear business and flexes its growing brand into the women's athletic apparel market as part of its larger international expansion plans.
Despite the recent move lower in UA shares this holiday season, which is seeing large discounts at J.C. Penney (JCP), Nordstrom (JWN), Macy's (M), American Eagle Outfitters (AEO) and other retailers looking to move seasonal merchandise ahead of stocking spring wear in early 2016, recent data show solid acceptance for UA's footwear line. More specifically, because of the strength of the recently released Stephen Curry sneaker and the Speedform running platform, Under Armour was called out as an emerging footwear brand at both the mall channel and at Foot Locker (FL) in particular.
While UA has enjoyed a strong relationship with Dick's Sporting Goods (DKS), Under Armour is in 30% to 40% of Foot Locker stores, and given the strength of UA's footwear performance this holiday season, we would not be surprised to see it rolled out at more Foot Locker stores and others in the coming quarters. Per data published by SportScan, Under Armour's footwear is seeing strong sell-through in basketball (again, Stephen Curry) and running sneakers (Speedform). We'd note this is the strongest UA footwear lineup has had heading into the holiday shopping season. Moreover, while holiday and seasonal apparel is taking it on the chin with sales and discounts, branded athletic footwear actually is seeing better pricing year over year, per SportScan.
One of the key attractions to Under Armour and its shares are the medium- to longer-term opportunities the company has in the global athletic apparel and footwear market as it makes more inroads into the women's market, expands its global footwear business and enters the sportswear market. In the September quarter, international revenues accounted for just 11% of overall UA revenues, and today the company has almost no sportswear-related revenue compared to Nike (NKE), which targets revenue for that category around $12.5 billion as part of its $50 billion revenue target by 2020.
Combined with other opportunities at Under Armour that include more footwear models, expansion of its golf line and even the company's Connected Fitness initiative, we remain comfortable with Under Armour's 2018 revenue target of $7.5 billion vs. the $3.08 billion delivered in 2014. Included in that target figure is the expectation that Under Armour will derive revenue of about $1.7 billion in fiscal 2018 from footwear alone.
Like many other companies, Under Armour continues to invest today for the growth it is expecting to deliver in the coming quarters. Like other meaningful expansions we've seen at other companies such as Starbucks (SBUX) that expanded aggressively into food on the back of falling coffee prices, Under Armour is poised to benefit from lower input costs. Two of the key raw materials contained in fabrics used by its suppliers and manufacturers include petroleum-based products and cotton. Cotton prices have fallen modestly year over year, but oil prices are down significantly year over year. Given the slowing global economy and likelihood we will see more oil hitting the market in 2016 once Iran resumes exporting, lower oil prices should remain a tailwind for Under Armour. The push-pull combination of revenue growth and lower costs should position Under Armour to drop incremental earnings to the bottom line in the coming quarters. (Starbucks is part of TheStreet's Action Alerts PLUS portfolio.)
Stepping back, we've seen the power of global brands mixed with sports before in the form of Nike. Under Armour has a blueprint before it; now the company simply needs to execute and build on its growing global brand awareness. As UA knows all too well given its strategy to leverage sports around the globe, follow-through is everything.