Under Armour, Inc.

(NYSE: UA)
7 July 2010
Maulik Shah

Business Overview

Under Armour, Inc. (UA) develops, markets and distributes performance apparel, footwear and
accessories for men, women and youth. Products are intended for athletes at all levels as well as
consumers with active lifestyles. The brand’s moisture-wicking synthetic fabrications are
engineered for wear in nearly every climate.

The company was founded in 1996 by University of Maryland football player Kevin Plank, who
currently serves as Chairman and CEO. Plank built the brand by distributing prototypes to teams
and individual athletes, relying on word of mouth to attract attention. The strategy remains in
place today, and Under Armour seeks to drive demand for its consumer products by building
brand equity as a leading performance athletic brand.

A majority of revenues are generated by wholesale distribution to retailers, institutional athletic

departments, leagues and teams. Under Armour products are found in over 20,000 retail
locations worldwide, of which nearly 16,000 are in North America. Principal retail customers
include Dick’s Sporting Goods and The Sports Authority, which accounted for approximately
30% of revenues in 2009. A less significant share of revenues comes from product licensing and
direct-to-consumer sales.

Geographic distribution of revenues favors North America; however, the company has a growing
presence in Europe and Japan.

Unaffiliated foreign manufacturers produce a majority of Under Armour products. For 2009, the
company estimated that 8 manufacturers provided 55% of products. The technically advanced
specialty fabrics used by UA are currently available from a limited number of sources. For 2009,
the company estimated that four suppliers provided 40-45% of the fabrics used in its operations.
Under Armour does not have control over the intellectual property rights in the technology,
fabrics and processes used to manufacture its products.

Given its strength in fall sports, Under Armour typically recognizes a sizeable portion of
operating income in the third and fourth quarters. In preparation for the fall selling season,
inventory, accounts payable and certain accrued expenses are typically higher in the second and
third quarters.

Recent Developments

• Under Armour began offering footwear in 2006 and continues to increase its offerings in
the space. During 2009, the company introduced performance running footwear and
soccer cleats. Between 2008 and 2009, UA’s footwear division experienced revenue
growth of 84.85%.

1
SWOT Analysis

Strengths:

• The company manufactures a limited number of apparel products from a Special Make-
Up shop located in Maryland. These products are typically special orders for high-profile
athletes, leagues and teams and represent an immaterial portion of revenues. The focus is
on providing superior service to select customers who will serve as brand ambassadors.

• UA enjoys strong awareness among young athletes. Most adults who attended college
and high school during the mid 2000s are also familiar with the brand.

• As the official supplier to teams of all levels (and a sponsor of numerous athletic events),
Under Armour has strong relationships with athletes who establish the on-field
authenticity of the brand.

• Under Armour enjoys favorable product placement at retail locations due to strong brand
image and recognition

• UA employs selective distribution practices, which are evidenced by the lack of UA

items selling at a significant discount to MSRP on eBay and other online retailers. [See:
http://www.kiplinger.com/columns/picks/archive/2007/pick0620.htm]

• None of the company’s three thousand employees are covered by a collective bargaining
agreement. Relations with employees are believed to be good.

Weaknesses:

• Management admits that the fabrics and technologies used in manufacturing UA products
are not unique to the company. Under Armour does not currently own any fabric or
process patents.

Opportunities:

• Management believes the trend toward a healthy lifestyle is global and intends to expand
international sales.

• More suppliers will become available for specialty fabrics.

• The company currently has no long-term agreements with manufacturers. [This could be
classified as S or T also]

• Rather than relying on a third party licensee, Under Armour hopes to begin selling its
own headwear and bags beginning in 2011.

2
Threats:

• Labor related work stoppages at fabric suppliers or manufacturers could result in

production delays. The concentrated nature of fabric suppliers magnifies this risk.

• Under Armour must compete for limited floor space at retailers. However, if retailers
earn greater margins from competitors’ products, they may favor display and sale of
those products.

• The purchasing decisions of consumers often reflect highly subjective preferences that
can be influenced by many factors, including advertising, media, product sponsorships,
product improvements and changing styles.

• Given that 30% of revenues were generated by sales to Dick’s Sporting Goods and The
Sports Authority, a decline in sales at or the loss of these customers could materially
affect Under Armour.

Recent Financial Performance

2010Q1 2009Q4 2009Q3 2009Q2 2009Q1

Revenue (M$) 229.41 222.22 269.55 164.65 200.00
Gross Margin (%) 46.92 51.36 49.73 45.11 44.61
Earnings Per Share ($) 0.14 0.30 0.52 0.03 0.08
Net Margin (%) 3.13 6.84 9.71 0.87 1.98
ROA (%) 9.92 9.06 8.05 8.76 9.29
ROE (%) 13.30 12.80 11.45 12.34 12.59

Valuation

Last Px Mkt Cap EV/EBITDA

Ticker ($) (Millions) P/E P/S P/B ROE LF T12M
HBI 25.01 2390.77 12.51 0.60 6.34 38.18 9.01
NKE 70.15 34071.89 18.13 1.79 3.48 20.67 10.60
DKS 25.78 2984.36 19.83 0.65 2.64 14.82 8.04
ADS 40.46 10649.25 19.94 0.76 1.99 10.49 9.58
COLM 46.64 1575.32 22.86 1.24 1.57 7.17 9.12
UA 35.91 1820.42 36.27 2.03 4.41 13.30 13.94

Unresolved Questions

• What is the company’s competitive advantage? Where is the moat? [Brand?]