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Under Armour’s Growth Bubble - Highly Competitive Market – Overestimated Expansion Potential - Valuation

Under Armour Valuation Project

Mia Seder, Julia Blanco, Ted Nehrbas, Claudia Esteva, Ryan Buzzell & Bobby Weaver

July 10, 2015

Tuck Bridge Summer Program 2015

Under Armour is overvalued by the market at $84 per share; we value UA at $68 per share

• UA’s revenue rates are expected to exceed the average market revenue growth rates in the short-term

• UA is a strong competitor, but lacks consumer ratings

Under Armour’s Growth Bubble

• UA’s brand continues to develop through originality, athletic performance and innovative enhancements

• UA has created a revolutionary fitness community to gain a competitive edge

Highly Competitive Market

• UA’s growth is currently driven by its women’s• apparel, footwear, and international development• UA faces associated risks from these opportunities

Overestimated Expansion Potential

• UA is overvalued• Increasing revenue growth rates is unsustainable in• their competitive market

Valuation

Under Armour’s Growth Bubble - Highly Competitive Market – Overestimated Expansion Potential - Valuation 2











Valuation

3 Under Armour’s Growth Bubble - Highly Competitive Market – Overestimated Expansion Potential - Valuation

The global sports apparel market is expected to increase from 3.4% to 4.0% starting 2015

2011 2012 2013 2014 2015E 2016E 2017E 2018E0

20406080

100120140160180

$ Billion

4.0% CAGR

3.4% CAGR

Total Global Sport Apparel Market Sales and Projections

Source: Statista

132 B

135 B

141 B

146 B

152 B

158 B

165 B

171 B


Under Armour 28.0%

UA constitutes a fraction of total market revenue but maintains the highest growth rate at 28%

Source: Market Realist Total revenue breakdown0%

20%

40%

60%

80%

100%

CAGR (2010-2014)

Lululemon 26.0%

Adidas 4.9%

Nike 10.0%

Other

Mar

ket %

Global Sports Apparel Market

5

3.4%


Consumer perspectives on athletic apparel brands’ strengths and weaknesses

Under Armour Nike Adidas Lululemon

Price

Technology Development

ConsumerPreference

Quality

Total 63/100 75/100 50/100 31/100

6

Least appealing to consumer

Most appealing to consumer












Valuation


UA’s original apparel innovation has provided the foundation for 20 years of high performance products

1996Compressio

n T-shirt

1998ColdGear

Mock

2006 Click-Clack

2011Charged Cotton

2012Armour Bra

2015UA Record

8

Adidas Clima-chill Nike Cold Tech. Fitbit Fitness Band

Product Equivalents


Strategic sponsorships help push Under Armour’s brand forward, but market remains competitive

9

41% increase in footwear

sales

Increased fan base

Women’s apparel

reaches 30%

Source: Nasdaq, USAToday

2x sponsorships

6/10 top endorsements

in 2014

Dominant sponsor in

all 5 big sports


UA creates the Record app to reach new customers

Synthesized fitness platform

Connected fitness community

120 million users

Mapmyfitness20 million users

Diverse suite of programs under it’s brand

MyFitnessPal80 million users

Leading fitness tracking application

Endomondo20 million users

80% of users outside U.S.

HTC GripWearable device

10

}$571 M

acquisition fee

Generates $8.4 M in tangible

Potential valuation of $5-

10B

Garmin application

VS.












Valuation


UA’s current drivers are women’s apparel, footwear, and international development

12

Expanding women’s market

Expanding footwear market

Worldwide distributio

n

UA’s Key drivers

Source: Guillermo


Women’s apparel is UA’s fastest growing segment, outcompeting the market nine times

2013 2014 2015E32

33

34

35

36

37

Athleisure Market

13

8% CAGR

4.1% CAGR

2013 2014 2015E 2016E0

200400600800

10001200

UA’s Female Market Revenue

650 M

1 B

$ Billions

$ Millions

35.7% CAGR

400 M 500 M

33.7 B

35.1 B

36.5 B

Source: Company Reports, Analyst Projections, NPD Reports Under Armour’s Growth Bubble - Highly Competitive Market – Overestimated Expansion Potential - Valuation

44.2% increase in UA footwear revenues from 2013 to 2014 with new footwear

2011 2012 2013 2014 2015E 2016E0

100200300400500600700

Footwear revenues$ millions

14Source: Forbes, UA


Between 2016 and 2020, international revenues projected to grow from 12% to 30%

2010 2011 2012 2013 2014 2015E2016E2017E2018E2019E2020E0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

International Revenue as a Percentage of Total Revenue

$655 Million

$4 Billion

25.7%

CAGR

Source: Company Reports


Existing UA store locations worldwide as of 2015

Market Position - Highly Competitive Market - Growth Opportunities/ Associated Risks - Valuation 16


Existing Nike store locations worldwide as of 2015


Under Armour faces four major limitations to future revenue growth

Limitations

Competitors

Limited international

brand recognition

Acquisition of fitness

community

Third-party manufacturers and suppliers

Middle East 15%CaSA

14% Asia 66%












Valuation



20

Beta: .739

WACC: 6.4%

Terminal Growth Rate: 3.0%

Current Share Price:

$85Estimated Share

Value: $68

Year 2015E 2016E 2017E 2018E 2019E Terminal

($ in thousands)

Total Revenue 4,102,212 5,455,942 7,256,403 9,651,016 12,835,851 13,220,927

Operating Cost 3,729,131 4,959,745 6,596,460 8,773,292 11,668,479 12,018,533

EBIT 373,081 496,197 659,943 877,724 1,167,373 1,202,394

After-tax Income 226,833 301,688 401,245 533,656 709,763 731,055

(+) Depreciation 95,582 127,123 169,074 224,869 299,075 308,048

(-) Change in NWC 66,124 83,580 89,782 93,967 94,645 97,484

(-) CAPX 610,000 158,904 211,343 281,086 373,844 308,048

Free Cash Flow (353,709) 186,327 269,195 383,472 540,349 633,571


Assumptions are conservative based on historical averages

21

2012 25%

2013 27%

2014 32%

2015E – 2019E 33%

Terminal Growth Rate 3.0%

COGS 51% of revenue

SG&A 37% of revenue

Depreciation 2.3% of revenue

Tax Rate 39.2%

Working Capital See appendix

CapEx See appendix

Revenue Growth Other Rates


UA price per share is most dependent on its COGS and SG&A expenses

22

Price Per Share ($)

COGS

SG&A

Revenue Growth

Terminal Growth

2012 2013 2014 Average

COGS 52.1% 51.3% 51.0% 51.4%

SG&A 36.5% 37.4% 37.6% 37.2%

20 30 40 50 60 70 80 90 100 110


Pessimistic, base, and optimistic revenue growth rate outlooks

Most Pessimistic

Somewhat Pessimistic Base Case Somewhat

OptimisticMost

Optimistic Revenue Growth Rate

27% 30% 33% 36% 39%

COGS(% of rev) 51% 51% 51% 51% 51%

SG&A(% of rev) 37% 37% 37% 37% 37%

Terminal Growth Rate

3.0% 3.0% 3.0% 3.0% 3.0%

Stock Price $46 $56 $68 $80 $94












Valuation


Appendix1. Intro Slide2. Executive Summary3. Market position exec summary4. Global sports apparel market growth5. Market revenue breakdown and competitor growth

rates6. Consumer perspectives7. Highly competitive market exec summary8. Apparel innovation timeline9. Strategic Sponsorships10. Record application11. Expansion Opportunities / Associated Risks exec

summary12. Key growth drivers13. Women’s apparel14. Footwear revenue increase15. International revenue growth16. UA map17. Nike map18. Risks19. Valuation exec summary20. Revenue breakdown/ Free cashflows21. Revenue growth forecasts

22. Sensitivity analysis23. Bear, base, bull cases24. Final exec summary25. Appendix26. UA sales growth27. Stock prices28. Total revenue breakdown by product29. Huge growth opportunities in the consumer health

industry30. If UA can monetize Record, potential value creation31. Growth of the consumer health market creates a

shift in health consumer needs 32. International revenue growth comparison to Nike 33. Perceptual map34. Athletic clothing preferences35. What is athleisure wear?36. Number of mobile devices with health apps37. Increase in UA owned stores 38. What is Under Armour?39. Coldgear/ Hotgear tech slide40. UA Map41. WACC Calculation42. Equity Value per Share Calculation


UA’s sales have grown at a rate of 28% and are projected to grow at 33% in the future

2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E0

2

4

6

8

10

12

14$ Billions

Total Under Armour Sales and Projections

28.0% CAGR

33.0% CAGR

Source: Analyst Projections

1.47 B1.83 B

2.33 B 3.08 B

7.26 B

9.65 B

12.84 B

4.10 B

5.45 B


Under Armour historical stock price

27

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100


With three different lines of performance and climate specific gear, apparel constitutes 75% of total revenue

Under Armour Revenue Breakdown...0%

20%

40%

60%

80%

100%

13% Footwear

9% Accessories

75% Apparel

3% Licensing


UA recognizes the huge growth opportunities in the consumer health industry

2013 2014 2015E 2016E 2017E0

5,000

10,000

15,000

20,000

25,000

30,000

Global mHealth app market revenueGlobal Sahipments of wearble fitness devices

Projections for wearable fitness de-vice sales of 1.8B by end of 2015

(USD $ millions)

Year

Revenues for global mHealth app’s projected $26.6 B in 2017


If UA can monetize Record, potential value creation is $5-10B

Ticker “Year 1”Sales (#M)

“Year 5” Sales (M$)

4-yr sales CAGR

Year 5 EOY market cap ($M)

Price-to-Sales Ratio

FB 272 5089 108% $63,142 12x

LNKD 79 972 87% $12,593 13x

TWTR 28 1403 165% $22,760 16x

YELP 48 378 68% $3,969 11x

GRPN 31 2574 203% $7,860 3x

ZNGA 19 1281 185% $1,839 1x

Average 79 1949 123% $18,694 10x

UA bull case 55 750 92% $7,192 10x

Bull Case for UA

Source: Bloomberg: Analyst Report


Projected ~50% growth of the $502 B consumer health market by 2017 creates a shift in health consumer needs

$502B

$737 B

Health Consciousness

In-home Diagnostics

Mobile Health AppsMobile health apps help consumers achieve these preventative actions.

In home diagnostic testing market is $15 billion, growing at ~5% per year.

-Increased awareness of consumers regarding preventative methods of health care- New “health-oriented” consumer increasingly pursues preventative measures that allow them to take control to improve their health outcomes.

Projected Consumer Health

Market


International revenue growth comparison to Nike shows room for progress

0%

10%

20%

30%

40%

50%

60%International Revenue as a Percentage of Total

Revenue

Source: Nike Company Reports

Nike 1982-1988

Under Armour 2010-2016

Nike 1995

Nike 2005


How does UA appeal to customers

Enhances athletic performance

Aesthetically sharp and distinctive

Affordable/practical

Appeals to conservative tastes

Highest quality/price

Comfortable for everyday wear


Under Armour evolves to satisfy changing consumer preferences

Comfort

Fit

Moisture Wicking

Flexibility

Breathability

0% 5% 10%15%20%25%30%35%40%45%

Athletic Clothing Preferences


Trends like “athleisure wear” have presented Under Armour with new sales opportunities

• What is “athleisure”?

• Why is it growing the market for athletic apparel?


Number of mobile devices with health apps projected to reach 1.7 billion by 2018 from 100,000 in 2013

2013 2014 2015 2016 2017 2018

# of

mob

ile d

evic

es d

ownl

oade

d w

ith

mHe

alth

app

100,000

1.7 billion


Increase in UA owned stores from 134 in 2014 to 153 in 2015

2014 20150

20

40

60

80

100

120

140

160

Factory House Stores

Brand House Stores

Num

ber o

f UA

stor

es


Founded by a former football player, UA caters to the specialized needs of athletes

38

• Started 1996• Founder: Kevin Plank

• Specialized performance apparel

• Sports footwear and accessories


Keeping with their mission, UA strives to provide the consumer with high quality, innovative gear

39

"To make all athletes better through passion, science, and the relentless pursuit of innovation"

Revolutionary Moisture Transport System


Opening of UA new international brand house stores and offices during 2015

Sao Paolo, Brazil

Abu Dhabi, UAE

ChinaGermany

40



WACC calculation

Risk-free rate 2.40%

Beta 7.39

Expected Return 7.94%

Market risk premium 5.54%

Cost of equity 6.49%

Average cost of debt 3.10%

Debt/Total Value 1.53%

Equity/Total Value 98.47%

WACC 6.42%


Equity value per share calculation

Estimated Long-term revenue growth rate 3.00%

Terminal Value 18,506,288

Enterprise Value 14,306,209

Cash & Cash Equivalents 593,175

Debt 284,201

Equity Value 14,615,182.92

Shares outstanding 215,537

Equity Value per Share 67.81


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