Under Armour :Yahoo Finance 2014 Company of the Year

It started 18 years ago with one man hawking one shirt, a guy trying to persuade elite football players that it was simply better – that it would make them better.

Today, Under Armour (UA) is a $15.2 billion company run by that same guy, stalking the legacy giants of athletic gear, a made-in-America global brand that boasts one of the fastest growth records in consumer products and among the best stock performance in the market.

For these distinctions and how they were achieved — and for the way the company has turned potential setbacks into wins in 2014 — Under Armour is the Yahoo Finance Company of the Year.

The squishy retail sales trends of 2014 were a mere rumor for Under Armour, whose revenue and operating profit are on track to climb more than 30%, accelerating from their 2013 pace. Its share price has soared 62.5% this year. And Under Armour’s strong branding efforts, deeply rooted in its sports-performance heritage, earned it Marketer of the Year honors from Advertising Age magazine.

CEO Kevin Plank, that guy who came up with that shirt in 1996 that stayed dry under football pads, says, “These things don’t happen out of nowhere. There were a lot of years preparing for this.”

Speaking in a model retail store on Under Armour’s six-building industrial-urban campus on the Baltimore waterfront, Plank recalls: “Sporting goods, which is where we entered, was this pie – and there was no room in the pie. So we decided, in order to break in, we would make our own pie.”

After finding takers for his pioneering moisture-wicking shirt among some college and pro football players, he expanded in a methodical but ambitious way into other performance garments – ones that kept an athlete warm, or cool, or feeling strong thanks to their compression fabric.

The company took two years to enter the shoe business, starting with football cleats and adding one sport category per year for five years. Its women’s line, once an afterthought, has expanded impressively from almost nothing in 2004 to more than $500 million this year. Total full-year company revenue will top $3 billion for the first time in 2014.

Over the past four-and-a-half years, Under Armour is one of only four companies in the Standard & Poor’s 500 to post at least 20% sales growth in each quarter. Since coming public in late 2005, revenue and earnings growth have averaged more than 30%, marking one of the elite growth stories of the past decade.

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Historical Stock Prices for Under Armour, Inc. (Weekly adjusted closing price from 1/5/10 - 12/15/14)

Historical Stock Prices for Under Armour, Inc. (Weekly adjusted closing price from 1/5/10 – 12/15/14)

Since its IPO, Under Armour stock is up a phenomenal 1,022%, compared to the merely amazing 408% gain by Nike (NKE), the global blue chip in athletic goods — which Plank repeatedly refers toonly as “our largest competitor” in a way that conveys suppressed competitive passion toward the $83.6 billion market-cap incumbent.

While its consistent growth trajectory from startup to the near-ubiquity of its UA logo might make Under Armour’s path appear effortless, this year began with a global controversy that threatened to undermine the brand’s very essence as a performance booster.

At the Winter Olympic Games in Sochi, Russia, U.S. speed skaters’ poor performance was partly attributed to the highly touted aerodynamic uniforms designed by Under Armour. While the company defended the “speedsuits” design, the athletes switched to their old uniforms and a moment of triumphant arrival for the company was tainted.

Yet the fleeting controversy failed to compromise the brand broadly. The Notre Dame and Naval Academy football teams signed on to be outfitted by Under Armour, giving the company claim to both “God and country,” as Plank has put it.

The company also bid hard over the summer to sign NBA MVP Kevin Durant to an endorsement deal when his contract with Nike lapsed, offering a reported $250 million over 10 years. Nike ultimately re-signed Durant after agreeing to structure a contract that could reach $300 million. The duel was a telling statement that Under Armour has aggressive ambitions to target the top in every category it’s in, but also reinforced its status as the hungry up-and-comer.

Plank embraces this image, seeing it as the core of the Under Armour brand, which he says means, “underdog, go get it done, find a way” – sounding plenty like the intense locker-room motivator in the original Under Armour “Protect This House” ads.

Winning with women

The company’s boldest gambit of the year, though, might have been its attention-grabbing “I Will What I Want” marketing campaign focused on accomplished women overcoming doubters and challenges.

“We launched as this big, bad American football company,” Plank says, and as the key back-to-school season opened, “we tell the world that our brand was about a ballerina.”

That would be Misty Copeland, of the American Ballet Theater, whose commercial focuses on her defying doubters who said she had “the wrong body for ballet.” Another viral ad followed, starring model Gisele Bundchen going through a grueling kickboxing workout.

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“I Will What I want” marketing campaign on display at Under Armour’s NYC retail store. (Photo: Siemond Chan)

The women’s business, led by workout clothes, has certainly benefited from the broader trend of gym wear serving as always-on attire, with yoga pants in some sense becoming the new jeans. Yet Under Armour has lately outperformed even Lululemon Athletica (LULU), the company most associated with that look.

Aside from the women’s business, which BB&T Capital Markets sees rising to more than 25% of revenue over four years, shoes and foreign markets are the key opportunities for the next phase of the company’s growth.

While growing nicely in Japan, Europe, China and South America, about 90% of Under Armour’s sales still come from the U.S. Never shy about setting lofty goals, Plank wants half of revenue to come from overseas one day.

A year ago, Under Armour bought MapMyFitness, a digital health-tracking app — the company’s first-ever acquisition. The service, with some 30 million members, works across a variety of devices, and will serve as a way for Under Armour to explore “connected fitness” without betting on the cutthroat hardware business.

Under Armour pays no dividend, but it’s hard to object to this given its breakneck growth pace and the high returns it earns on investing in the business. The company has gone to significant lengths to assure its clothing suppliers adhere to fair labor standards. And its use of an old Procter & Gamble (PG) facility as its headquarters shows great commitment to downtown Baltimore, helping to revitalize an entire neighborhood.

The Company of the Year judging

The Company of the Year is selected by Yahoo Finance editors, using a mix of quantitative and qualitative factors to recognize a prominent American company that has excelled on behalf of investors, employees and customers.

This is the third year we have granted this honor. The 2013 winner was Walt Disney (DIS) and the 2012 winner was Gap (GPS). The evaluation process combines one-year and long-term financial results; stock-price performance; strategic vision and brand esteem; good corporate citizenship; and a demonstrated ability to overcome challenges.

This year, Under Armour was awarded the title over a handful of other high-achieving, well-managed U.S. companies, including Home Depot (HD), Marriott International (MAR), Southwest Airlines (LUV) and Starbucks (SBUX).

[Under Armour sponsors the Rivals Camp Series of Rivals.com, part of Yahoo Sports. The sponsorship connection had no bearing on our Company of the Year evaluation.]

Running room – but beware stumbles

As successful as the company has been, there are at least two stark challenges ahead of Plank in the coming years.

One is Wall Street’s towering expectation for the company’s continued growth. After the stock’s upward charge this year, it trades for more than 70-times 2014 earnings and over 50-times the 2015 forecast. Under Armour’s average price-to-earnings multiple since coming public is around 35; Nike, a far more mature and slower-growing company, trades at 25-times fiscal 2015 profits.

A harder-to-quantify risk is that Under Armour’s brand might grow so powerful and ubiquitous that it, in a sense, undermines the underdog image it was built on. Perhaps only Apple Inc. (AAPL) managed to go from aggressive, maverick underdog to world domination without shedding much of its “cool” factor.

Plank is undaunted by the high bar set by Wall Street, believing that with Under Armour sales still only one-tenth of Nike’s, “there is a lot of running room for us.” Quite true. But expensive stocks often make investors intolerant of little bumps along the way.

Plank also doesn’t feel the company is close to having to worry about compromising the brand’s underdog ethos. Under Armour’s mission statement says, “Make all athletes better,” Plank notes, which means remaining focused on performance and not simply settling for becoming a fashion or “basics” brand.

Plank points to UA’s entry into shoes with football cleats in 2006, followed over the next four years by baseball cleats, training, running and basketball shoes. The company went from nowhere to number one in American football cleats in eight years, with a 35% share.

Can Plank possibly believe his company can work its way to the top of each category it enters? Quoting the movie “Predator,” Plank says, “If it bleeds, we can kill it.”

 

Nike (NKE) shares got the boot from investors this morning ( Friday, Dec.19). The athletic shoe and clothing company said orders for December through April are less than analysts’ had anticipated, especially in emerging markets. On the flip side, Nike is reported second quarter earnings and revenue that topped Wall Street forecasts.

Tax site  http://www.youroffshoremoney.com

 

Natural Grocers by Vitamin Cottage BUY

NGVC : NYSE :

US$19.35 BUY 
Target: US$30.00

COMPANY DESCRIPTION:
Currently operating over 80 store locations, Natural
Grocers by Vitamin Cottage is a retailer focused
exclusively on natural and organic groceries (~65% of
sales), dietary supplements (~25% of sales), and
body/pet care products and health-minded books
(collectively ~10% of sales). Store locations span 14
states primarily across the Western US, with a geographic
concentration in Colorado and Texas.
All amounts in US$ unless otherwise noted.

Consumer & Retail — Health, Wellness and Lifestyle
A COMP RECOVERY SHOULD DRIVE VALUATION;

MAINTAIN BUY, $30 TARGET
Investment recommendation
We view Natural Grocers as well positioned in a favorable
industry with a growth equation that should drive attractive
revenue and EPS growth.
Investment highlights
 NGVC delivered EPS in line with consensus ($0.01 below us)
on $2M in revenue upside. Comps of 3.7% bested our 2.5%
estimate, and were very resilient despite heightened
competitive pressure.
 Quarter to date Q1 comp approaching 5%, bolstering our
confidence in the turn in comp momentum. A plethora of
initiatives, along with easing compares and new competitive
pressure having peaked should yield continued comp gains.
 F2015 EPS guidance in line with consensus and EPS growth
only impaired due to higher incentive comp YOY.
 F2015 EPS reduced $0.01 to $0.65, while we introduce
F2016 EPS of $0.79, equating to 21% growth.
 $30 target unchanged. The valuation of 28x forward earnings
looks full, but at 8.5x EBITDA we expect expansion. Our
target reflects 11.5x C2016 EBITDA.

GAP – don’t drop your pants BUY

GPS : NYSE : US$40.14

BUY 
Target: US$47.00

Consumer & Retail — Specialty Retail
LONG-TERM MARGIN DRIVERS REMAIN IN PLACE;

OUR NEAR-TERM VIEW IS MORE CONSERVATIVE

 

Investment recommendation
We are lowering our Q4 EPS estimate for GPS by $0.09 to $0.68,
below prior consensus of $0.77. There is more work to do in the
Gap brand (38% of TTM sales) than we had previously
anticipated, particularly in the women’s business. As a result, we
are lowering our consolidated SSS estimate from flat to a decline
of 2.4% on top of +1%. Our gross margin forecast moves 50bps
lower, and we now expect 59bps of expense deleverage on the
lower sales. Our BUY rating remains intact despite the near-term
headwinds. We continue to expect supply-chain initiatives will
drive gross margin expansion over the long term. This does not
appear priced in with shares trading at 13x our C2015 EPS
estimate and 7x C2015E EV/EBITDA.
Investment highlights
 Art Peck will begin his CEO stint with two new brand
presidents. Jeff Kirwan (10 years with GPS, recently as
president of Gap China) will take the reins from Stephen
Sunnucks at the Gap brand in December, and Andi Owen (19
years at GPS, recently leading the Gap outlet business) will
head up Banana Republic beginning in January, replacing
Jack Calhoun.
 Our price target moves from $51 to $47 as we incorporate
our updated estimates into our DCF model.

GAP Target Price $ 51

GPS 

NYSE : US$37.90 BUY 
Target: US$51.00

COMPANY DESCRIPTION:
Gap is a global specialty retailer of clothing and
accessories for women, men, and children. GPS brands
consist of Gap, Old Navy, Banana Republic, Athleta, and
Piperlime. The company operates 3,200 stores
worldwide, and GPS products are sold through nearly 400
franchise locations.
All amounts in US$ unless otherwise noted.

Consumer & Retail — Specialty Retail
Q3 EARNINGS SHAPING UP BETTER THAN WE HAD ANTICIPATED
Investment recommendation
We are raising our Q3 EPS estimate by $0.08 to $0.73 driven by
better margins than we had expected. GPS guided for Q3
adjusted EPS of $0.72-$0.73, excluding a $0.06 benefit resulting
from the recognition of certain foreign tax credits. Prior
consensus was $0.71. We are raising our Q3 gross margin
estimate by 50bps and reducing our operating expense rate by
90bps. We expect gross margin expansion to return in Q4 and
continue into FY15 and beyond as GPS starts to reap the rewards
from its supply-chain initiatives, at first through fabric
platforming and later from vendor managed inventory and rapid
response inventory management. We continue to believe the
long-term margin expansion opportunity is underappreciated
and not reflected at the stock’s current valuation of 12x our
C2015 EPS estimate and 6x C2015E EV/EBITDA.
Investment highlights
 October SSS split the difference between our estimate and
consensus. GPS’s consolidated October SSS declined 3% on
top of +4%, versus our -4% forecast and consensus of -2%.
October is largely a clearance month, and we are leaving our
top-line outlook unchanged for the remainder of FY14.

 We are raising our price target by $2 to $51 based on our
discounted NOPAT model.

Family Dollar Stores Target Price $ 74.50

FDO : NYSE : US$77.75
HOLD 
Target: US$74.50 

COMPANY DESCRIPTION:
Family Dollar operates over 8,000 retail discount stores
in 44 states, providing a merchandise assortment
including consumables, home products, apparel and
accessories, seasonal goods, and electronics.
Merchandise is generally sold for $1 to $10.
Consumer & Retail — Specialty Retail
RAISING PRICE TARGET TO $74.50,
IN LINE WITH DEAL PRICE DESPITE SOFT Q4
Investment recommendation
We continue to move closer to the completion of the acquisition
of FDO by Dollar Tree (DLTR : NASDAQ : $56.70 | HOLD). In
early September, the companies accelerated the expected
timeframe to the end of November, compared to the initial
schedule of early 2015. We are raising our price target to the
deal price of $74.50 (which includes $59.60 in cash and $14.90
in stock). We would take a much more positive view on the
combined entity as it would create an instant market-share
leader with over 13,000 stores and annual sales of $18B. We
think DLTR’s superior merchandising organization and greater
store consolidation than what was included in the companies’
initial outlook would drive annual synergies above the $300MM
the merger is expected to generate by year three.
Investment highlights
 Dollar General is still in the picture. DG extended its
$80/share tender offer to 10/31, but FDO remains confident
this combination would not receive antitrust approval.
 Q4 EPS missed our estimate by $0.07, but shares should
continue to trade on the potential acquisition. FDO reported
Q4 EPS of $0.73 on SSS +0.3% on top of flat. Gross margin
was 90bps below our forecast, and there was 16 bps more of
SG&A expense deleverage than we had anticipated.

Rent-A-Center BUY

RCII : NASDAQ : US$26.59
BUY 
Target: US$32.00

COMPANY DESCRIPTION:
RCII is the largest RTO operator in the United States with
over 40% market share. The company operates
approximately 3,025 stores in North America. RCII also
operates nearly 1,360 AcceptanceNOW kiosks located
within retail stores, offering RTO agreements to
customers unable to garner financing to make an in-store
purchase.
All amounts in US$ unless otherwise noted.

Consumer & Retail — Specialty Retail
UPGRADING SHARES TO BUY AS MORE FLEXIBLE LABOR MODEL
SHOULD DRIVE MARGINS HIGHER
Investment recommendation
RCII dug deeper into the initiatives aimed at improving
profitability in the core business at Canaccord Genuity’s Global
Growth Conference, and we think the decision to transition to a
more flexible labor model is a no brainer. In Q2, virtually all of
the core’s yr./yr. revenue decline fell through to the bottom line
as a result of the company’s fixed-cost labor model. We think
there is an opportunity to substantially reduce labor costs by
incorporating more part-time hours into the core RTO business.
The addition of Guy Constant as CFO should prove valuable
through this transition, as his 10-year tenure in the restaurant
industry has exposed him to a much more efficient labor model.
We believe simply replacing overtime hours in 20% of core RTO
stores with part-time labor would generate over $20MM in
annual cost savings in 2015 and lift RCII’s operating profit
margin by 110bps. We are raising our rating to BUY given the
potential EBIT margin and EPS upside we believe this transition
offers.
Investment highlights
 We are increasing our long-term EPS estimates by 28% on
average. Our 2015 estimate of $2.59 is $0.25 above
consensus.
 Our price target moves to $32 based on our DCF model.

Gordmans Stores BUY More then a double BUY

GMAN : NASDAQ : US$3.96
Target Price $ 9.00
COMPANY DESCRIPTION:
Gordmans Stores is an everyday value price retailer
offering merchandise up to 60% off department and
specialty store prices. The company operates nearly 100
stores in 20 states, located in multiple shopping center
formats including regional shopping malls, lifestyle
centers, and power centers. The merchandise
assortment consists of apparel, home fashions, and
accessories including fragrances.

Consumer & Retail — Specialty Retail
WE AWAIT IMPROVED Q2 PRODUCT AS AGED INVENTORY HAS BEEN CLEARED
Investment recommendation
GMAN generated a Q2 loss of ($0.16) per share, in line with our
estimate and a penny below consensus. As expected, the
company spent the bulk of Q2 clearing out stale inventory ahead
of H2. The higher level of markdowns resulted in 95bps of yr./yr.
gross margin contraction in Q2, which did not come as a surprise
to us. We believe this was necessary to make room for an
improved product assortment, including the recent launch of a
Missy contemporary department. Gross margin should begin to
recover in H2 as better product rolls into stores. We believe SSS
will be slower to rebound, however, and we are lowering our Q3
SSS forecast to -5% on top of -6.1% versus our prior flat estimate.
This pushes our Q3 EPS estimate from $0.02 to ($0.09). We
continue to believe GMAN’s long-term recovery potential is not
reflected with shares trading at 0.2x C2015E EV/revenue.
Investment highlights
The appointment of department store veteran Andrew Hall
as CEO should bring some stability to GMAN. Hall spent six
years at Stage Stores, including a run as CEO from 2008-
2012, and 13 years prior at May Department Stores.
We are reducing our price target from $10 to $9 based on
our DCF model. There is still notable turnaround risk here,
but we believe investors will be paid for their patience.

Dick’s Sporting Goods In The Rough ?

DKS : NYSE : US$44.21 HOLD 
Target: US$49.00

Consumer & Retail — Footwear and Apparel
WORKING THROUGH STIFF HEADWINDS,

Investment recommendation
DKS reported Q2 EPS of 67c. vs. our estimate and consensus of 65c,
driven by stronger-than-expected comp growth of 3.2%, tighter expense
controls and a lower share count, partially offset by gross margin
contraction as steep promotions in golf drove traffic at the expense of
margins. The hunting category continues to experience challenges as it
comp’d -HSD in 2Q14.
That said, growth in other outdoor categories is
offsetting the weakness in guns/ammo, which drove flat total category
comps. The company provided EPS guidance of $0.38-$0.42 for 3Q14,
including a -2c impact due to higher SG&A expense related to 32 new
store openings in the third quarter.
Investment highlights
 DKS has taken meaningful steps to mitigate the impact of the
struggling golf business, but the promotional activity is expected to
continue into 2H. Also, generally high promotional activity across
the industry will impact DKS by an estimated 4c in 2H14 as it will
need to keep the promotional pace with its competitors to drive
traffic. Lastly, hunting is expected to offsetDKS is benefitting from its move to reduce sq ft in golf and increase
the space in Women’s & Youth apparel. We would like to see an
incremental reduction in golf sq ft.; however, the company is being
methodical about the space shifts and resulting cost/benefits.
Valuation
Our $49 target is a blend of 15x 2015E EPS, 8x EBITDA, and DCF the growth in other
outdoor categories in the near term.

Michael Kors Holdings Limited

KORS : NYSE : US$77.01
BUY 
Target: US$123.00

Consumer & Retail — Footwear and Apparel
SOLID Q1; BIG PICTURE GROWTH INTACT: REITERATE BUY, $123 PT
Investment recommendation
KORS reported solid Q1 EPS results of 91c vs. our 82c estimate. Stronger
comps (+24.2% vs. our 20% est.) and gross margin expansion (+20bps
vs. our -20bps est.) drove the beat. Broad based growth across
geographies and categories continues to be robust as evidenced by NA
comps of 18.7%, European comps of 54.2%, and Japan comps of 48.8%.
Not only does KORS continue to take share domestically, but it is also
taking share from luxury brands across Europe.

With respect to gross margins, wholesale margin expansion of 62 bps more than offset
incremental markdowns at retail (-48bps) that were driven by a higher
sell thru mix of markdown product despite the same SKU count and rate
of markdowns y/y. That said, margin guidance for Q2 and the year is
-50bps from down slightly previously as the much anticipated and very
natural evolution of margin normalization has begun. We therefore
expect to see modest margin contraction in both retail and wholesale in
the near term, until retail mix helps margins mix higher.

Overall, F2015 guidance was raised by a few pennies in excess of the beat. We believe
the stock’s reaction (-6%) is unwarranted given the momentum the
brand has across its business. Moreover, the current valuation (18x
forward EPS) puts KORS at a 30% discount to its growth rate. With still
vast market share growth opportunities in Europe and Asia, which
combined represented just ~16% of total sales last year, we would use
this weakness as a buying opportunity. We reiterate our BUY.
Investment highlights
Europe continues to experience dramatic growth (+128% in Q1).
With greater confidence in its brand positioning, KORS increased its
long term market opportunity to $1.5B in sales from $1B

Lumber Liquidators Holdings

LL : NYSE : US$70.42

BUY 
Target: US$100.00

COMPANY DESCRIPTION:
Lumber Liquidators is the largest specialty retailer of hardwood
flooring in the U.S. The company offers premium hardwood
flooring products in a wide variety of domestic and exotic wood,
as well as engineered products, laminates, bamboo, cork, and
accessories. Lumber Liquidators assortment is largely comprised
of proprietary brands including the flagship Bellawood brand.

Consumer & Retail — Specialty Retail
MOMENTUM VANISHES IN Q2 PUSHING OUR ESTIMATES LOWER
Investment recommendation
We are lowering our Q2 EPS estimate from $0.94 to $0.61,
compared with guidance of $0.59-$0.61 and prior consensus of
$0.90. LL reported a Q2 SSS decline of 7.1% on top of +14.9%
versus expectations of +7%. Total customers invoiced declined
5% yr./yr., the steepest decline in three years. LL did not regain
momentum after difficult Q1 weather as we had anticipated, and
management is blaming macroeconomic factors. The 131 stores
impacted by weather experienced a SSS decline of 13%, with
non-impacted stores -2%. We are lowering our FY14 EPS
estimate from $3.35 to $2.70 on SSS -2.5% on top of +15.8% (we
had previously forecast +6.3%). We still project double-digit sales
and EPS growth over the long term, keeping us BUY rated. Given
consecutive quarterly EPS misses and limited near-term visibility,
we think investors will view LL as a show-me stock over the next
few months.
Investment highlights
 An inventory shortfall accounted for $18MM of Q2’s $47MM
revenue downfall versus our estimate. LL expects quality
assurance-related supply-chain issues to resolve in Q3.
 We are reducing our price target from $122 to $100 based on our discounted free cash flow model. This is a long-term target, and reflects our belief that LL’s model of better selection, service, and value should enable it to take market share

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