Summary: Under Armour is a Wall Street high flyer currently trading at 63 times earnings. However, almost 25% of its stock is currently being shorted. It is either going up or down in a big way. What’s your guess?
In the latest BusinessWeek there is a story highlighting Under Armour about how it may be the biggest short on Wall Street. Investors don’t believe that it can live up to expectations. It is a niche company that is being flushed from its niche.
The company is 11 years old and, for most of its history, it has focused on performance sports apparel. In fact, for most of its history, it was called KP Sports after its founder Kevin Plank. It did very well growing by word of mouth until it commanded a majority of its market niche. And a profitable niche it was. Then, a year and a half ago, it went public and everything changed. Before, Plank might have been perfectly happy running a profitable medium sized company and owning his niche. But the public is not tolerant of companies that don’t grow. Investors looked at its history and saw very strong profitable growth. They wanted in because they expected that growth to continue. They are all about capital appreciation. They are not tolerant of sitting on a profitable niche. However, once you own 75% of your niche like they do, unless your niche becomes mainstream the only way to grow is to move on to other pastures.
So, 10 months ago, Under Armour introduced its first footwear products. These were in the niche cleat market. They did really well and captured 20% of the football cleat market out of the gate. While that is fantastic, it still pales in comparison to the size of their apparel business. In 2001, they were doing $19M in sales. Last year they did $431M in sales. The problem they have is that investors want to see consistent or rising growth percentages. Now that they are a $400M company, they can’t continue their growth clip by going after niche markets – those markets are just too small. The foray into cleats is great but everyone expects them now to go into mainstream running shoes – a much bigger market.
While the allure of the market is strong, it is filled with much larger, entrenched companies. Where before they had weak or non-existent rivals, if they move into running shoes, it’s a whole new ballgame.