Athletic apparel company Under Armour (NYS: UA) closed out its fiscal 2011 with strong earnings. However, inventory problems remain, and the competition shows no sign of fatigue. Still, many investors think Under Armour is a buy. Let's take a look at what the company is doing to shape up for the year ahead.
Management continues to throw money behind its foray into the athletic footwear business. A better idea would be for Under Armour to tackle its current inventory problems before attempting to beat Nike's (NYS: NKE) shoe domination. As a leader, Nike innovates at every turn. Recently, Nike launched its new Nike+ FuelBand -- a fitness wristband that syncs with your iPhone to track and monitor your every move. It's hard for me to imagine Under Armour taking significant market share from Nike in the sneaker arena, especially with Nike's tie-ins.
Survival of the fittest
With inventories growing faster than sales, Under Armour could face steep markdowns on its current merchandise -- further depressing already thin profit margins. Rival lululemon athletica (NAS: LULU) has the opposite problem (if you can call it that). The retailer can't seem to make enough luxury yoga gear to meet demand.
I think it's a mistake not to consider Lulu a strong competitor in the athletic apparel space. True, the yoga company fits a niche market. But it's expanding into new segments including girls dance apparel and athletic gear for runners. Lulu's product line for men is also expanding, which puts it in closer competition with Under Armour.
Another retailer pushing into the space is Limited Brands (NYS: LTD) . Through its Victoria's Secret stores, the company is offering a new line of athletic wear for women. Although the fit-focused apparel from VS doesn't match up to the fabric innovation found in Under Armour's thermal wear or Lululemon's luon products, it is indicative of the competition that's heating up in this space.
Net Profit Margin
Break a sweat
Investors want to see growth from these companies. But that may be a tall order for Under Armour considering the headwinds facing the company. Its stock continues to trade at a high price-to-earnings multiple, though not nearly as rich as Lulu's P/E.
Under Armour is also strapped for cash. The company's high-maintenance brand demands cash-heavy promotions and marketing efforts. High costs have led to Under Armour's negative free cash flow situation. Take a look at Under Armour's net profit margin compared to competitors, and our fears are compounded.
As my fellow Fool Austin Smith recently pointed out, Under Armour and Nike sell their products through retailers such as Dick's Sporting Goods (NYS: DKS) . However, Lululemon distributes through its own stores and website -- allowing it to keep more of the profit from sales. Under Armour, on the other hand, is too dependent on Dick's for sales growth, which could be a problem going forward.
All three of these companies make great athletic gear. While I'm a fan of Under Armour's thermal tops and compression shorts, I can't get behind the stock. Why not invest in The Motley Fool's top pick for 2012. I invite you to read this free report, available for a limited time, in which our leading analysts' reveal their top stock for the year ahead. Click here for instant access -- it's free.
At the time this article was published Foolish contributor, Tamara Rutter owns shares of Lululemon. Follow her on Twitter using the handle: @TamaraRutter. The Motley Fool owns shares of lululemon athletica, Under Armour, Dick's Sporting Goods, and Limited Brands. Motley Fool newsletter services have recommended buying shares of Nike, Under Armour, and lululemon athletica. Motley Fool newsletter services have recommended creating a diagonal call position in Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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