Pitched 1/1/05

Under Armour (UARM), $22.30 Updated: 11/30/05

Buy- Medium Conviction- Catalysts: Estimates are published (12/05), Q405 Earnings (1/06?)

Background:

Under Armour (UARM) manufactures performance-oriented athletic apparel. 90% of UARM’s sales are to retail stores, and men represent 67% of sales, but women’s (19%) and accessories (5%) are the fastest growing segments of the company. Since 2000, revenue has increased from $5.3m to $263.4m while Operating Income has increased from $.7m to $32.7m for the 12 months ended 9/30/05. How? By writing a love letter to their customer: the athletic, brand-conscious teenager. Through association with elite athletes, from NFL linemen to Navy Seals, UARM has created intense promotions so appreciated by fans, that they are used in stadiums as motivational crowd prompts.

The overall sports-apparel market was $38.8b in 2004, active sports apparel was $12.0b and the market for compression tops and bottoms was $416m, of which UARM had a 73% share. Growth should come from women’s apparel, licensing revenue, international expansion and new products such as cleats.

Investment Thesis:

Under Armour should advance from $22.30 today to $25.00 as analyst estimates are published and it trades at over 30x’06 numbers of ~$.76/share. On exceptionally strong holiday sales, UARM should advance to $30 as people are willing to pay a multiple of 35-40x for a tremendous retail brand with the potential to demonstrate multiple years of 30%+ EPS growth driven by 20-30% top-line growth and margin expansion.

Under Armour is an extremely hot brand for teenagers. Over Thanksgiving, I went to my old gym and saw many high school and college students with their UARM shirts. When I spoke with them, it was clear that not only football players were buying UARM, but a diverse mix of athletes that included rowers, runners and young women. I then called 20 retail stores across the country belonging to two of their largest customers, Dick’s and The Sports Authority. When I asked employees working in apparel for their holiday recommendations, Under Armour was consistently the first or second brand mentioned. Multiple employees referred to the Under Armour customer as often price-insensitive.

Speaking of the consumer, this week, amongst other bullish indicators, The Conference Board’s measure of consumer confidence came in at 98.9, above expectations for 90, gasoline prices continued to fall and Q3 GDP growth was revised upwards. In stores, WMT (Nov +4.3% SSS), Chico’s (+11.8%), ANF (+23%), LTD (+5%) have recently confirmed the strength of the consumer.

There are currently no Wall Street estimates for Under Armour, as the company just went public (11/18). I consider it highly unlikely that, in this current regulatory and strong economic environment, Goldman Sachs would take a consumer product company public and then see them disappoint Wall Street with earnings. I have modeled EPS to $.76 in ’06 and $1.00+ in ’07, 30%+ Y-Y EPS growth. A 30x forward EPS multiple would put UARM at $30+ in a year. While any model on a rapid growth story built on only an S1 filing and no quarterly reports is, clearly, potentially specious, it serves the useful exercise of demonstrating that going forward, UARM should present itself to analysts as a company with a clean balance sheet capable of demonstrating strong profitability growth and positive free cash flow.

Risks/Other:

Key risks include a downturn in consumer spending and the potential for UARM to be a fad. There are no published estimates right now, and analysts could introduce conservative forecasts hurting a valuation argument. Currently UARM trades for about 30x ’06 numbers, compared to about 15x ’06 for competitors such as Nike, Columbia, and Timberland. However, overall revenue and EPS growth for those names is forecast to be in the mid-single-digits, compared to UARM’s 30%+. In the S1, UARM does not disclose how many stores they are in this year compared to last year, which raises the issue of whether these sales are demand-driven as opposed to channel filling. However, my primary research makes me doubt channel stuffing. That said, while I believe in my research, I wish that I had a metric that I could compare y-y growth in as a possible proxy for revenue growth. Lastly, valuation metrics such as FCF Yield (expected to be ~1% in ’06) and EBITDA multiples make UARM appear overvalued compared to competitors. As I am recommending UARM as a trade, not a long-term investment, I am comfortable buying an “expensive” stock. Of note, UARM has very low stock-based compensation expense ($.01 of ’04 EPS) and allegedly has rebuffed an acquisition offer by Nike.

Conclusion:

Buy UARM for a holiday trade based on currently favorable risk/reward tradeoff, close position by Q405 earnings report. My “edge” is based on: 1. Primary research talking to UARM’s target customer, 2. Calling 20 of their largest customer’s stores across the country and 3. Building a working model ahead of any Wall Street published models. This research gives me confidence buy here based on the strength of demand for the product this holiday season and earnings-based valuation support for the stock in the low $20’s.

Additional Data Points Post-Pitch:

I just saw a research report from Thomas Weisel... TW took a tour of the store with the CEO of Dick's Sporting Goods, my particular favorite parts were these: "...Mr. Stack also highlighted that sell-through in performance/technical apparel category continued to be robust behind Under Armour and NIKE with particular strength in women's and Under Armour fleece... Performance is the cornerstone of Dick's 2006 merchandise strategy: We believe that Dick's will continue to invest in performance apparel behind the NIKE and Under Armour brands and plans to increase square footage dedicated to Under Armour on its women's athletic apparel pad."