Under Armour (UA)/(UAA) has grown into a leading apparel and accessories brand in the United States, with a focus on developing innovative performance goods in the athletic space. As a result, the company has won favor with consumers (as evidenced by its ability to charge premium prices for its merchandise) and retailers (which value partners that can drive traffic into their stores). To build on the gains realized on its home turf--more impressive given that it is going to bat against established players like Nike (NKE) and Adidas--Under Armour is expanding its network abroad as well as moving into new categories like footwear and women’s wear.
While these expansive plans have driven Under Armour to build out its infrastructure, crimping near-term operating income potential, we think these investments should further support its brand intangible asset and ensure that the company remains a valued partner for retailers. Further, we think that its efforts to expand its sales base, particularly internationally, should solidify the pricing power inherent in the brand, the primary factor behind our narrow economic moat rating, as Under Armour increases brand awareness and garners a larger share of its addressable market over time. Additionally, the company should reach a more scalable sales base over the next few years, enabling margin expansion, which could have implications for an improving cost position long term.
John Brick, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.