Under Armour Company: History, Finance, and Investment Recommendations
Brief History of the Company
Under Armour was established in 1966 by a young man, Kevin Plank, who was the University of Maryland’s special soccer team leader. The idea of creating his clothing came to him suddenly; it was preceded by observations during training. Specifically, Kevin noticed that his compression shorts stayed drier and better than his jerseys after practice. He decided to try designing his t-shirts out of synthetic fabric that repelled moisture and were more suitable for the workout. Plank realized the idea through trial and error; he also made changes based on feedback from his team members.
At first, he sold directly from the trunk of his car, and the company was founded in the basement of his grandmother’s house. Sales were a huge success, and at the end of 1996, Kevin managed to sell his products for $17,000 (Under Armour, Inc, 2018). It was an incredible success, and no one expected it. Even the company’s name shows that Plank succeeded from scratch; he chose the word ‘Armour’ only because a toll-free phone number with that variant was still available.
Today the corporation is one of the most successful on the market, with even famous sports stars eagerly buying its products. It is an example of how a simple yet practical idea can favor hundreds of thousands of customers and take the business to a global level. Under Armour now focuses its production on these types of sporting goods that will make training as comfortable as possible even in the harshest of conditions (Under Armour, Inc, 2020). However, ordinary buyers can also choose essential sportswear to their desire. Kevin Plank has created a vast company that constantly improves and makes its products even more robust, more comfortable, and more consumer-oriented.
Description of the Company and Its Industry
Under Armour, Inc. is an essential corporation in the market because, together with its subsidiaries, it develops, sells, and distributes branded clothing, footwear and accessories. It offers its products to men and women in North America, Europe, the Middle East, Africa, Asia-Pacific, and Latin America. It is worth noting that the organization occupies an important place in the sports industry because it suggests clothes of different cuts and styles for sports. However, Under Armour, Inc. also produces excellent shoes for running, basketball, or other sporting games. In order to be competitive in the sporting goods industry, the company manufactures accessories such as bags, hats, and gloves. The firm sells its commodities through wholesale channels, independent and specialized retail stores, department stores.
Adidas AG, Nike Inc., and Under Armour Inc. are the three most prominent retailers in the competitive sportswear industry. At the beginning of November 2020, Adidas boasted a market capitalization of $ 63 billion (Under Armour, Inc, 2020). Adidas has a more organized business in European countries. The Adidas Group owns two other sports brands, particularly Reebok and TaylorMade. Although Adidas was initially known as a football brand, owning other brands strengthens its position as a successful player in the field of sportswear and goods.
As of early November 2020, Nike was worth about $ 203 billion. Nike is one of the main competitors because it has the largest market share in the field of sportswear in North America. The group trades most of its goods under the name Nike, but it also owns smaller brands such as Jordan and Converse. The corporation intends to significantly increase direct sales and e-commerce revenues in developed markets (Under Armour, Inc, 2020). Thus, the company Under Armour is currently the youngest of the three competitors. At the beginning of November 2020, the market capitalization of Under Armour was about 6.36 billion dollars.
Comparison of Financial Data
From the analysis of the company’s balance sheet for three years, it can be concluded that it is constantly using debt for its activities. However, this does not always have a negative effect because financial liabilities can act as an element that allows the business to grow. Under Armour had $804 million in debt in September 2021, compared to $1 billion in 2019. However, such a figure does not necessarily indicate an underperformance, as the company also has over one billion in cash to offset the debt, of which $535,000,000 is net cash (Under Armour, Inc, 2019). The company’s liabilities gradually increase compared to 2018-2019, but profits also continue to rise. At the same time, the level of accounts receivable has fallen.
The latest balance sheet data shows that Under Armour has $1360000000 in liabilities due during the year and $1660000000 in liabilities due after that. Compensating for these responsibilities, the firm has $1350000000 in cash and $642,900,000 in accounts receivable due within 12 months. Thus, the company’s liabilities are $1030000,000 more than the combination of cash and short-term receivables. As for fixed assets, their quantity is, for the most part, stable. The only thing that changes the most is equipment, which has grown significantly since 2018 (Under Armour, Inc, 2018). Given Under Armour’s market capitalization of $10.0 billion, it is hard to believe that these liabilities pose much of a risk. Despite the significant debts, Under Armour boasts net cash, so it is fair to say it does not have a large bill load.
The figures presented in the profit and loss statements for three years are because the company imposes encumbrances on some customers in the form of surcharges for delivery. Accordingly, to economic principles, such fees are reflected in net income. Under Armour includes most processing costs such as sales components, general and administrative expenses. Nevertheless, they include certain costs for the operation of the company’s distribution facilities. These costs included in sales, general, and administrative expenses amounted to $ 80.5 million, $ 81.0 million, and $ 91.8 million for 2020, 2019, and 2018, sequentially (Under Armour, Inc, 2020). Therefore, the business includes the cost of outbound transportation associated with the shipment of goods to buyers as part of the cost of goods sold.
Accordingly, it allows Under Armour to generate revenue after-sales rather than introduce these indicators in its expenses. It is remarkable to note that the appearance of the 2020 income statement was influenced by the announced decision to sell MyFitnessPal. Thus, $ 179.3 million was added to the total profit (Under Armour, Inc, 2020). For comparison, the corporation provided sales, general and administrative expenses for fiscal 2019, amounting to $ 5.5 million of costs that were decreased in previous periods.
Besides the report’s analysis, it should be regarded that the costs consist of unrealized and received gains and losses from the firm derivative instruments in foreign currency. That is, the income statement consists of profit and loss from hedging in foreign currency related to income received by business entities in the operating segments of the business. Therefore, fluctuations in foreign currency create such indicators for 2020 $, 2,383,353, 2019 – $ 3,167,625 and $ 3,141,983 for 2018. Such signs in recent years are related to market factors, and the Covid-19 pandemic caused a large effect in the last two years. Analysis of the statements shows that net interest expenses amounted to $ 47.3 million, 21.2 million dollars, and 33.6 million for the financial years 2020, 2019, and 2018, in accordance. Interest expense incorporates amortization of charged financing costs, bank fees, capital and amounts that meet the lease requirements, and interest expense on loan (Under Armour, Inc, 2020). The company is currently monitoring its creditors’ financial condition and stability in the long run; however, instability has a negative impact on performance.
Operating activities consist mainly of net income adjusted for certain non-cash items. Cash flows from operating activities decreased by $ 119.2 million up to 509.0 million dollars in 2019 from 628.2 million dollars in 2018. This process resulted in a decrease in net cash inflows from operating assets and liabilities of $ 360.2 million. The reduction in cash inflows is due to a drop in cash receivable by $ 232.3 million in 2019 compared to 2018. Another significant factor was the decrease in savings and repayment obligations of customers by $ 176.9 million in 2019. It is essential to remark that changes in operating activities took place in 2020 due to the sale of the MyFitnessPal platform. Thus, cash flows from operating activities decreased in the financial year 2020 by 296.2 million. The reduction was due to net losses in fiscal 2020 of $ 549.2 million compared to a net profit of $ 92.1 million in 2019 (Under Armour, Inc, 2019). Therefore, there was an increase in accounts payable and accrued expenses by 237.4 million dollars in 2020.
Funds used in investing activities declined by USD 55.8 million up to 147.1 million dollars in 2019 from 202.9 million dollars in 2018, primarily due to a reduction in capital expenditures. Additionally, a reason is the acquisition of a 10% stake in Dome Corporation. Total capital investments amounted to 144.3 million dollars and 154.3 million dollars in 2019 and 2018.
In 2020, specialists can see an increase of 213.5 million dollars to 66.3 million dollars, principally due to revenues from the sale of MyFitnessPal for 198.9 million dollars in 2020 (Under Armour, Inc, 2020). Total capital investments in fiscal 2020 decreased by $ 53.5 million to $ 92.3 million compared to $ 145.8 million in 2019.
In 2020, cash used in financing activities decreased by 52.8 million dollars to 137.1 million dollars in 2019. This reduction was fundamentally due to a drop in loans and net payments on the company credit line in 2019 compared to 2018. Cash provided through financial activities in 2020 increased by 573.9 million dollars to 436.9 million dollars from cash used in financing activities by USD 137.1 million in 2019 (Under Armour, Inc, 2020). This increase was principally due to the issuance of $ 500 million 1.50% of senior convertible notes in the 2020 year.
Financial Analysis of the Company
Profit Margin, Return on Assets, and Return on Equity Ratios
The return on Armour’s assets for the financial years from December 2018 to 2020 averages -0.7%. Return on assets of Under Armor decreased in 2020 (-11.1%) and increased in 2018 (-1.1%) and 2019 (2.0%). This indicator shows that the efficiency of the use of enterprise assets is less than 5 percent, so it is negative. The return on Nike’s assets decreased in 2018 (8.4%) and 2020 (9.2%) and increased in 2017 (19.0%), 2019 (17.4%) and 2021 (16.6%) (Under Armour, Inc, 2020). In the company of a competitor, on the contrary, there is a positive trend.
The company earnings on return on equity ratios from 2018 to 2020 averaged -3.7% for the financial years. Under Armour works with an average return on equity of -2.3% from 2018 to 2020. Critical to note that the capital of Armour reached a minimum in 2020 -28.7%. In terms of income, Armor on common capital decreased in 2020 (-28.7%) and developed in 2018 (-2.3%) and 2019 (4.4%). If analyzed the past three years, Under Armour’s gross profit topped in June 2021 at 49.4%. In terms of gross profit margin, Armour reduced in 2017 (45.2%, -2.8%) and increased in 2018 (45.5%, + 0.5%), 2019 (46.9%, + 3.2%) and 2020 (48.6%, + 3.5%). That is, net sales of goods and profits are positive (Under Armour, Inc, 2020). Nike’s gross profit ratio declined from 2019 to 2020 but then increased from 2020 to 2021, surpassing the level of 2019.
|Fiscal Year||Cost of Goods Sold||Avg. Inventory||Inventory Turnover|
|2018-12-31||$2.832 B||$1.089 B||2.6x|
|2019-12-31||$2.797 B||$955.9 M||2.9x|
|2020-12-31||$2.302 B||$894.1 M||2.6x|
Another significant indicator for any company is its inventory turnover ratio, which measures the number of goods sold and inventory replacements for the year. In this case, as the table shows, the efficiency of the capital turnover ratio was kept at an average of 2.7. It indicates that the corporation does not have too much inventory, so there are not many storages or write-down costs. This figure is enough for the business to meet the consumers demand, but the sales level is decreasing, disturbing further capital growth. Under Armour’s inventory turnover peaked in 2019 (2.9x, +12.5%), while it was lowest in 2018 and 2020.
|Fiscal Year||Total Revenue||Average Assets||Asset Turnover|
|2018-12-31||$5.193 B||$4.126 B||1.3x|
|2019-12-31||$5.267 B||$4.544 B||1.2x|
|2020-12-31||$4.475 B||$4.937 B||0.9x|
The asset turnover ratio determines how efficiently a company uses all of its assets to generate income. In 2018, the company had a higher ratio, while now it is gradually decreasing. It means that the corporation is losing efficiency in using its assets to generate revenue (Under Armour, Inc, 2018). Under Armour’s asset has a tendency to decline in each fiscal year, and accordingly, its lowest rate was in December 2020 at 0.9x. Such a precipitous drop significantly lowers the company’s position among competitors, as their annual performance is much higher, for example 1.3x for Nike and 1.7x for Crocs.
|Fiscal Year||Current Assets||Current Liabilities||Current Ratio|
|2018-12-31||$2.594 B||$1.316 B||2.0x|
|2019-12-31||$2.702 B||$1.422 B||1.9x|
|2020-12-31||$3.223 B||$1.413 B||2.3x|
Under Armour’s current ratio is volatile and works with a median of 2.0x. These indicate that the company manages to use its current assets and short-term financial resources efficiently. It does not have difficulties in meeting current obligations, and its borrowing is on track. As can be seen from the table, the quick liquidity ratios are constantly growing and reached (1.5x, +37.6%) in 2020 Under Armour, Inc, 2018). Such figures mean that in 2018 current assets were deficient to cover payments. However, in 2021 they have stabilized and are now in sufficient quantity to be liquidated instantly to pay off current liabilities.
|Fiscal Year||Cash & ST Investments||Accounts Receivable||Current Liabilities||Quick Ratio|
|2018-12-31||$557.4 M||$665.6 M||$1.316 B||0.9x|
|2019-12-31||$788.1 M||$724.3 M||$1.422 B||1.1x|
|2020-12-31||$1.517 B||$550.2 M||$1.413 B||1.5x|
Under Armour / common share capital debt for the financial years, from 2018 to 2020, averaged 60.4%. The figure of 60 percent already complicates borrowing money. Nike’s debt-to-equity rate is higher at 87.5%; further debt can benefit investors if the business offers a return on acquired stocks above interest payments. Under Armour has been operating at an average debt/equity of 45.4% for the three proposed years. In general, many investors are looking for a company with a debt ratio of 0.3 to 0.6. in terms of net risk. Thus, the debt decreased in 2018 (36.1%, -20.5%) and increased in 2017 (45.4%, + 12.8%), 2019 (60.4%, + 67.2%) and 2020 (119.7%, + 98.0%) (Under Armour, Inc, 2019). Under Armour’s average interest rate over the three financial years averaged 7.4x. Under Armour ‘s has been operating at an average interest rate of 5.3x for fiscal years. According to the company interest rate coverage ratio, in 2020, it reached its lowest level of -0.2%, and it decreased in 2017 (4.5 times, -71.2%) and 2020 (-0.2 times, -101.4%). This average percentage is negative for the company ‘Under Armour’.
Return on Investment Ratio
The company’s return on assets ratio demonstrates the performance of the business and financial investments. Regarding Under Armour’s profitability over the last three years, a trend with an average of nine percent can be seen. It is relatively low compared to other players in the market. Although the figures are positive, they are not enough for a company with high-production level. The multiple earnings that stock investors are willing to pay per share of the firm are also significant for any company. Nowadays, Under Armour’s ratio for the last twelve months is 25.0x. It can be concluded that it is an excellent condition among smaller businesses. At the same time, it is one percent behind Columbia but almost twice behind Nike. This gap can be attributed to 2018, when the p/e reached a negative value. However, despite all the difficulties, the company is slowly returning to past performance as earnings grow.
Under Armour also does not pay a dividend, which means that it keeps all of its profits. Companies usually prefer to retain cash if they believe there are more attractive opportunities to reinvest (Under Armour, Inc, 2019). Under Armour has not yet financed its growth with this cash flow. It can be explained by the deterioration of the situation in 2018. The business was in a crisis, and despite the revenue growth, the free cash flow was negative.
The Company’s Beta
When a stock has a beta higher than 1, it means the stock is supposed to grow by more than the business in up markets and reduce more than the business in down markets. Under Armour Inc. demonstrates beta version 1.57(Under Armour, Inc, 2019). This is above 1; instability Under Armour Inc. is higher than market volatility, according to this indicator.
Strategic Direction of the Company
The company’s team is constantly working on the relentless transformation of the business. Its short-term goal is to improve and adapt tax measures to updated U.S. law. Long-term purposes include creating innovative programs for market leadership. The brand plans to foster a deeper connection between the company and its customers and strives to create an optimized supply chain and improve service levels (Under Armour, Inc, 2019). There is also a need to ensure effective and sustainable revenue extension through increased margins, cost efficiencies, and investments in strategic growth initiatives.
As financials have experienced significant transformation, the need to achieve sustainable results with a long-term growth strategy should be emphasized. By 2023, earnings are expected to return to a low double-digit growth rate, including medium and high single-digit five-year compounded annual growth rates, driven primarily by the company’s international direct business customers. Owners also plan to increase earnings per share and return on invested capital.
Recommendation Decision on Future Investment
In 2021, the company may be an opportunity for investors. Total revenue increased 35 percent, and gross margin increased 370 basis points to 50.0 percent. Sales, general, and administrative expenses declined 7% to $ 515 million primarily due to lower legal and marketing costs than the previous year. Operating profit is now expected to reach approximately $ 105 million to $ 115 million. Excluding the impact of restructuring efforts, adjusted operating income is expected to be $ 230 million to $ 240 million, compared with previous expectations of $ 140 million (Under Armour, Inc, 2020). Thus, Under Armour Inc. emerges from the crisis even in a pandemic and is profitable for investments.
Under Armour, Inc. (2018). Annual report on form 10-K. Web.
Under Armour, Inc. (2019). Annual report on form 10-K.
Under Armour, Inc. (2020). Annual report on form 10-K. Web.