Can Under Armour Get To $7.5 Billion In Sales By End Of 2018?

Under Armour Inc UA, at its September 2015 analyst day, outlined plans to reach $7.5 billion in revenues by 2018, more than double the 2014 base of $3.1 billion in just four years.

The top drivers include better penetrating existing product categories, expanding retail store footprint and further developing channels of distribution.

"Since outlining these ambitious goals last September, competitive dynamics have shifted (both ADS and PUM accelerated towards end), and we think UA considered minimal, if any, competitive headwind," Oppenheimer analyst Anna Andreeva said in a client note.

Where Will Growth Come From?

Almost 60 percent of growth is expected to come from growing wholesale through expanded points of distribution and deeper wholesale relationships within existing doors. By geography, the company plans to add almost $900 million in international sales while the bulk (70 percent) of the growth is still expected to come from North America.

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In the last five years, global athletic marketplace grew in high single digits, with Nike Inc NKE and Under Armour capturing largest shares at expense of mature European brands. Now Adidas/Puma reset sights on US, especially in footwear, Under Armour's plans to add $1 billion in shoes by 2018 could be challenged.

"Estimate if ADS/PUMA recapture 25% of lost share=$500M sales hit, $0.15 to UA EPS," the analyst said.

Guidance

The company guidance embeds Under Armour adds 2x the incremental dollars annually as during '10-'15, despite competition building (ADS guided '16 North America up double digits, acceleration from mid-single digits).

"At $2.5B in US apparel, UA is already half NKE's apparel size; '18 guidance to double could be stretchy, especially given softer women's (estimate sales only up HSD over Holiday)," Andreeva noted.

With 30 percent of growth coming from lower margin footwear, Under Armour is baking in doubling U.S. market share (to almost 9 percent). No doubt Under Armour has the hottest athlete in the game (Curry 3 this Fall) with the Olympics catalyst ahead; however, the company has already penetrated cleats, basketball appears to be slowing, and lifestyle push unproven.

The biggest question is if it can sell as many shoes as Nike. Selling about 24 million pairs of shoes (Nike sells about 500 million), the analyst estimates Under Armour retail store productivity in footwear is already 30 percent that of Nike, where footwear is largest category.

"Adding $1B in incremental volume by '18 means wholesale growing at faster clip, which could necessitate entrance into lower-tier doors (JCP, KSS), especially now given TSA closures/DKS softer," Andreeva said.

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After four quarters of positive sales/inventory, Under Armour's spread turned sharply negative in the second half of 2015; with inventories staying high through the second quarter of 2016, gross margins could be pressured longer.

The company is embedding 24 percent revenue CAGR as part of its three-year forecast to reach $7.5 billion by '18 (almost double from current levels in a shorter period of time) which doesn't leave much room for error; this is at a time when more established European brands (adidas AG (ADR)ADDYY and Puma) are gaining momentum in the all-important North America region.

Under Armour trades on sales momentum, and any deceleration in North America especially would lead to multiple contraction from current all-time highs.

"With capex up 50% in '16, expect FCF negative in '16/'17 ($0.70/share combined). At 50x '17E, UA's multiple sustained by explosive sales, no valuation support for cracks in growth algorithm," Andreeva added.

Andreeva has a Perform rating on the stock, which was down 1.2 percent at $80.30 on Wednesday. Shares have gained 5 percent in the last year.