Shorting the Sports Shorts

06/21/2013 7:00 am EST


This stock has had a tremendous run, but competitive pressures may send it reeling, says David Mamos of Money Morning.

Under Armour (UA) is one of the fastest-growing brands, with a 60% share of a $3 billion market. A leader in synthetic performance apparel, the company has built its reputation by delivering high-quality, technologically advanced clothing that keep athletes cool, dry, and light.

More importantly, it has taken the current vogue generation by storm as something cool, cutting-edge, and a must-have for a "serious" athlete.

The good news for investors in Under Armour's financial results are quite astounding. First-quarter 2013 net revenues increased 23%, to $472 million from the year-ago quarter, and it is forecasting revenues of $2.21 billion for the current year-up 21%.

Under Armour is putting an emphasis on direct-to-consumer channels such as factory stores and e-commerce, with much higher margins than wholesale customers like Dick's Sporting Goods (DKS). In 2012, this segment accounted for 29% of revenues. But the company plans to open ten factory stores and up to two specialty stores in 2013.

It is following the typical pattern of many hot apparel brands: Fast growth, rapid distribution, product-line expansion, and direct-to-consumer stores. And Under Armour is about to embark on the next phases—international growth (currently 6% of sales) and new apparel categories. But it will face some of the most dominant names in sports apparel: Adidas and Nike (NKE), which gets 58% of its revenues from overseas.

Under Armour plans to open stores in Asia and Europe, while increasing its brand recognition through partnerships with popular sporting leagues.

Under Armour became the Olympic sponsor for USA Gymnastics through the 2020 games, giving it a global stage and increased brand awareness-specifically among women, who now account for only $400 million in sales, compared to $1.8 billion for men.

Under Armour is also working to grow its footwear segment, where 2012 revenues were $238 million, but market share only 2%, compared to Nike's 60%. Under Armour is making a push into new shoe categories such as basketball and running.

My concern here is simple: Will the high-tech clothes translate into high-tech shoes, where Nike is still the forerunner? It may be that hot and popular apparel is just translating into hot and popular shoes, without any new technological superiority to them.

The next stage is to address the much larger market of active or casual wear—a tricky arena, since the category is led by the deep pockets of Nike, Adidas, and even Hanes' (HBI) Champion brand.

That's why if I were a holder of this stock, I would take my profits and "run."

The share price has gone from $6 in 2009 to all-time highs of over $63 today—a 950% run, and it's up over 30% year-to-date! It seems like a company built on the "cool" factor.

I'm not denying that Under Armour apparel is good quality, has better technology than competitors, has a great marketing team, and even looks good. I can even foresee a few quarters where this spruces sales further.

But here's a not-so-secret tidbit: The company touts its great technological innovations, but none of these innovations are patented. Anybody with deep pockets can swoop in and really put pressure on Under Armour's core business.

In the short term, Under Armour is a strong, vibrant, and cool brand that will attempt to carry that strength into the tough global environment. In the long term, though, I don't believe that technological advantage will hold, and Under Armour will have to rely on quality and value.

And no amount of sharp marketing can make me buy this one right now. I am a seller of Under Armour.

Read more from David Mamos' "After a 950% Run, Is Under Armour Overheated?" at Money Morning...

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