Can Shoes Drive This Athletic-Apparel Market Higher?

Under Armour has been a fantastic pick for investors. Shares are up nearly 1,000% over the last five years. The company came through with another solid quarter during the fourth quarter. Earlier this year Under Armour posted that both revenue and the gross margin came in better than expected.  

Sizing up the competition
Another strong company is Nike . Although it's not quite as robust, Nike's stock is up more than 170% over the last half decade. It also pays a 1.3% dividend yield, while Under Armour pays nothing. But it's tough to compare it to Nike--Under Armour is the Nike of the 90's, when the company was still a very strong growth story. Over the last five years, Under Armour has grown revenue at an annualized 25%. Meanwhile, it doesn't have the exposure to international markets that Nike has. Under Armour still gets more than 90% of its revenue from North America.

The next next big growth opportunity
One of the key opportunities for Under Armour is to break into the international markets. Nike already has a strong presence abroad. Earlier this year, Under Armour announced it was entering Brazil. Great timing, considering the FIFA World Cup is being held there in 2014.

It's initially launching running and footwear in the country. But that's just the tip of the iceberg. Consider the fact that Nike gets more than $25 billion in revenue from international markets compared to Under Armour's total revenue of slightly more than $2 billion. China is another big opportunity for Under Armour, and right now Under Armour only has five stores in China. The ultimate goal is to get its international revenue (as a percent of total revenue) up to 12% by 2016.

Even one of its top competitors has a strong international presence: Columbia Sportswear . Columbia gets more than 35% of revenue from outside the U.S. and Canada. Shares of Columbia are up more than 11% over the last month and a half thanks to the cold winter, which is why the apparel maker beat fourth-quarter earnings estimates by 30%. But one of the big positives for Columbia investors is that the company has noted that the strong performance actually began before the cold weather.

But will a transition to footwear be a positive?
Under Armour plans to make a move into the high-growth basketball category. It's already recruited various NBA stars to help sell its new basketball shoes. The basketball category has been a great growth story for the likes of Nike. The move toward basketball shoes is another positive, where Under Armour's growth in running shoes was in the low-single digits for March.

While Under Armour is looking to get into the basketball space, Nike continues to own the running market. In March, Nike's running shoe sales increased more than 9% year over year. Its market share for the category jumped to 63% at the end of last month versus 58.4% during the same month last year.

One worry surrounding Under Armour's goal of gaining a larger presence in the footwear market is that it could reduce margins. The margins in the footwear business aren't quite as robust as they are in apparel. Under Armour currently only gets around 13% of revenue from footwear.

How shares stack up
Under Armour's two-for-one stock split, completed last week, has made the company a bit more affordable to retail investors. The stock price has gone from more than $100 to just $50. Regardless, there still remains the valuation issue.

By all accounts, the stock appears to be expensive. It trades with a 70 P/E and a 4.9 P/S. Compare that to Nike's 21.9 P/E and 2.4 P/S. And if you look at where Under Armour has traded in the past, its current 70 P/E is well above its average P/E of 50 over the last decade. As a result, 70% of the 30 analysts following the stock have a "hold" rating.

Bottom line
For investors on the fence, the key concern is valuation. Under Armour still has plenty of growth ahead of it. But given the current valuation, investors might be best served waiting for a pullback. However, for investors looking to invest in the still- growing athletic-apparel market, Under Armour is worth keeping an eye on.