UA Equity Valuation Examination (Sample Project)

UNDER ARMOUR

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-‐ Shares Currently Over-‐priced as of December 31st 2013 (date of latest filing)

-‐  Short or sell UA stock (Minimize your losses) -‐  Analyst Name: Raphael Denize (6406365)

AGENDA

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RecommendaOon (Conclusion)

ReconciliaOon to Arrive at One Share Price

Discounted Cash Flow ValuaOon

Company Analysis

Economic Analysis/Industry Analysis

Company Analysis

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Strengths •  Leader in providing high tech undergarment for athletes. •  They are gaining market share at a higher rate than its

competitors. •  Their brand is easily recognizable by consumers which has

allowed them to be successful in entering new segments and competing with firms like Nike and Adidas.

•  They have been able to attract females and the younger generation. This is currently driving their growth .

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Weaknesses •  RelaOvely high cost of producOon as wages conOnue to increase making operaOng

margins relaOvely low around (10% historically). •  Their lack of patents internaOonally means that anyone can copy their products

and produce them at a cheaper price. •  They are in a really compeOOve and declining market, with high risk of subsOtute

products and high costs for raw materials. •  They also have a limited number of distributors and do not have an internaOonal

presence. •  In order to conOnue to grow they will have to conOnue to diversify their product

mix in this declining industry. •  They will be compeOng with much larger companies that have a lot more money

on hand to spend on markeOng and on capital to grow their sales. •  ConOnuing to spend on capex will be crucial to the conOnued growth of UA in the

industry.

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SWOT Analysis

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-‐  Heavy compeOOon in the sporOng industry.

-‐  DifficulOes differenOaOng in footwear sector.

-‐  Unpredictable US economy.

THREATS

-‐  Rapid decline in footwear sales.

-‐  Largely dependent on US market.

-‐  Narrow exposure in professional sporOng industry.

WEAKNESSES STRENGTHS -‐  Dominant Presence in

Football and Baseball market in North America.

-‐  Pioneer and leader of the US

performance apparel industry.

-‐  Strong relaOonship with

distribuOon channels.

-‐  Culture focused on sports related performance.

-‐  Strong brand recogniOon in North America.

SWOT Analysis

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OPPORTUNITIES •  Invest in R&D in order to develop innovaOve footwear especially in the

specialty footwear segment.

•  Penetrate the European and Asian markets by targeOng sports like soccer

that are popular over there.

•  Implement customizaOon features like Nike ID they have been bringing in a lot of money for Nike. So much that

Adidas soon followed suit.

This is the design my own shoe feature for Nike. If implemented properly shoe sales will grow for Under Armour.

More OpportuniOes for Growth

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-  Invest in R&D to develop new and innovative performance shoes.

-  Sponsor more prominent athletes in their respective sports.

-  Incentive programs for distributors.

-  Continue innovating in specialty footwear category such as cleats in football and soccer and endorse successful athletes.

-  Capitalize on performance apparel. -  Sponsor major European and Premier League

teams. Soccer is the number one followed sport in the world. Entering that market will be vital to international success.

-  Sponsor key players in top European sports since everyone around the world watches European soccer that could be a good start.

-  So far Under Armour has attempted to grow

internationally by investing in soccer and endorsing Japanese teams as well as select teams in the Mexican league.

DifferenOate in the Footwear Market

Penetrate the European and Asian Markets

Stock Performance

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As you can see, Under Armour Inc. has been consistently outperforming the market. This may be due to the fact that Under Armour is sOll a relaOvely young company in comparison to its compeOtors . It has just begun to diversify its

product segments in order to conOnue growing.

Industry Analysis

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Industry Forecasted Revenue Growth By Segment

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USD million 2013 2014 2015 2016 2017 2018

Apparel 298,862.50 301,443.60 306,043.50 311,316.90 317,120.50 319,538.80

Growth (%) _________ 0.864% 1.526% 1.723% 1.864% 0.763% Footwear 66,999.80 68,187.90 68,876.90 69,653.60 69,991.60 70,925.00

Growth (%) _________ -2% -1% -1% 0% -1% Sportswear 81,674.30 84,075.10 86,961.70 89,667.90 91,715.20 93,983.60 Growth (%) _________ 2.94% 3.43% 3.11% 2.28% 2.47%

-‐  As you can see, the sporOng goods industry is in the decline stage of the product life cycle.

-‐  In order to sustain conOnued growth a substanOal amount of capital will have to be spent product extension and improvement in order for Under Armour to differenOate its product from the compeOOon.

PORTER’S 5 FORCES

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THREAT OF SUBSTITUTE

INDUSTRY RIVALRY

SUPPLIER POWER

THREAT OF NEW

ENTRANTS

BUYER POWER

BUYER POWER

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HIGH Consumer has many op9ons under the following criteria: -‐ High quality -‐ Performance enhancement -‐ Style -‐ InnovaOve

DifferenOate your product by exceling in the execuOon

of consumer criteria.

SITUATION MITIGATION

SUPPLIER POWER

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LOW -‐  Large number of

suppliers that can provide the necessary raw materials

-‐  Low cost associated with materials

ConOnue using flexible manufacturing contracts upon expansion. Drive

improve operaOng margins by improving operaOonal efficiency and creaOng

higher end products with greater margins.

SITUATION RecommendaOon

THREAT OF SUBSTITUTE

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LOW -‐  Non performance apparel

(cokon t-‐shirts)

-‐  Growing performance apparel industry

Ensure product innovaOon is aligned with the

performance industry. ConOnue targeOng children and female in order to drive growth. The populaOon is

aging


THREAT OF NEW ENTRANTS

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LOW -‐  Complex distribuOon

networks

-‐  High level of R&D required

-‐  Capital requirement

-‐  Establishing a brand

ConOnue leveraging your posiOon as industry pioneer


INDUSTRY RIVALRY

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HIGH -‐  Giant compeOtors Nike

and Adidas -‐ Established distribuOon

network -‐ High level of capital -‐ Strong market shares -‐ Strong global brand

reputaOon

Invest heavily in R&D and markeOng to improve brand equity. ConOnue to invest in Capex in order to come up with innovaOve ways to akract customers in order to take market share away

Nike and Adidas.


Discounted Cash Flow

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Year Over Year DistribuOon of Sales

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-  As you can see from the above table, sales have been contributing the same amount for Under Armour and we are not optimistic that those figures will change very much since sales internationally are growing at around the same rate as sales in North America.

-  International sales grew at an average rate of 30% over the past 4 years while sales in North America grew at a rate of 28% in North America.

-  We believe that international sales and North American sales will continue to grow at the same rate in the future and that international sales will continue to contribute to about 6% of the sales figure.

2013 2012 2011 2010 2009

% of % of % of % of % of

(In thousands)

Net Revenues

Net Revenues

Net Revenues

Net Revenues

Net Revenues

Net Revenues

Net Revenues

Net Revenues

Net Revenues

Net Revenues

North America $2,193,739 94% $1,726,733 94% $1,383,346 94% $997,816 94% $808,020 94%

Other foreign countries 138,312 6% 108,188 6% 89,338 6% 66,111 6% 48,391 6%

Total net revenues $2,332,051 100.00% $1,834,921 100.00% $1,472,684 100.00% $1,063,927 100.00% $856,411

Sportswear ConsumpOon by Country

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As you can see, the U.S spends a lot more on sportswear than any other country. They make up 35% of the market. UA will have to capitalize on their home market while maintaining there global growth rate of 30 % in order to conOnue growing at a reasonable rate. They’ve been

growing internaOonally at around the same rate as their domesOc growth in the US. Us sales sOll make up

about 90%of sales for Under Armour.

Growth RaOonale

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•  We decided to grow the sales by product mix rather than by there internaOonal growth since there internaOonal growth has been growing at virtually the exact same rate as sales in North America.

•  Given brand relevance and recogniOon, we believe ongoing product innovaOon will conOnue to drive world wide growth. An example of such innovaOon is:

•  The syntheOc performance apparel market which keep athletes warm in cold temperatures and cool and hot temperatures is a growing market and under armour a leader in that market. They have about 60% of that market share.

•  Charged Cokon technology (created a $200M new business in two years)

•  Growth in footwear (every 1% of market share in just the running category represents an incremental $60M)

•  Growth in non-‐tradiOonal distribuOon (department and specialty stores)

•  Investments in the women’s business (represenOng 29% of sales today)

Clearly Capex has consistently paid off for Under Armour!!

RaOonal for Growth Rates

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-‐  A thorough industry analysis shows us that footwear sales will be higher than apparel sales in the industry. Therefore it will be crucial for Under Armour to invest and innovate in that department in order to conOnue to grow.

-‐  Last year’s decline in sales growth in

footwear products can’t persist. Under Armour's CEO has realized that and has invested a lot in that department and has even added strategic members to his team in order to take a share of that segment .

More RaOonale for Sales Growth

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Product Mix Year over Year Sales Growth by Product Mix Forecasted Sales Growth by Product Mix

Year 2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F Apparel 13% 31% 31% 23% 27% 25% 20% 15% 10% 10%

Footwear 61% -7% 43% 32% 25% 35% 30% 25% 25% 25%

Accessories 11% 25% 202% 25% 30% 20% 20% 20% 15% 10%

License Revenues 11% 18% -7% 22% 23% 13% 14% 13% 17% 16% -  We believe that accessories sales will continue to grow at a very high rate and we have assigned them a growth rate of

20% in 2014 to 2016 then it will decrease to about 10 by 2017. We also see apparel sales increasing due to increased demand by women. Investments were made to design products that were fashionable in order to attract women. Now sales of women products make up around 29% of total sales. We expect that figure to grow at a reasonable rate. Thus, we have assigned the apparel segment a growth rate of 25% for 2014. We believe it won’t be able to sustain such a high growth rate and will decrease slightly to 15% in 2016.

-  Management has stated that one of its near-term product focuses is the rollout of a new, improved footwear line that will compete in the higher ASP ($100+) performance category versus their prior, less successful launch in footwear ($50- $60).

-  We believe that this will bring the footwear sales growth to new highs. We have projected sales in the footwear segment at 35% year over year. We believe that this is a bit conservative considering the fact that footwear purchases will make up about 40% of all sales in the sports wear industry.

-  For license sales we believe sales growth will remain steady; therefore, we applied the moving average to the determine sales from 2014 to 2018.

Growth RaOonal ConOnued •  We lowered the values as Ome passed because there would be no way

that UA sustain such high growth rates in the future. •  They are already amongst the fastest growing firms in the industry due to

the fact that they are relaOvely new entrants in the market. •  Also, the industry is in the decline stage of the product life cycle;

therefore, Under Armour will inevitably have to stop growing at such a high rate.

•  There will come a point where UA will be unable to take anymore market share away from established firms like Nike and Adidas and will grow at a rate closer to the GDP growth.

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Historical Sales Growth by Segment

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2008 2009 2010 2011 2012 2013

$578,887.00 $651,779.00 $853,493.00 $1,122,031.00 $1,385,350.00 $1,762,150.00

$84,848.00 $136,224.00 $127,175.00 $181,684.00 $238,955.00 $298,825.00

$31,547.00 $35,077.00 $43,882.00 $132,400.00 $165,835.00 $216,098.00

$29,962.00 $33,331.00 $39,377.00 $36,569.00 $44,781.00 $54,978.00

$725,244.00 $856,411.00 $1,063,927.00 $1,472,684.00 $1,834,921.00 $2,332,051.00

Forecasted Sales

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2014F 2015F 2016F 2017F 2018F

$2,202,687.50 $2,643,225.00 $3,039,708.75 $3,343,679.63 $3,678,047.59

$403,413.75 $524,437.88 $655,547.34 $819,434.18 $1,024,292.72

$259,317.60 $311,181.12 $373,417.34 $429,429.95 $472,372.94

$62,397.77 $71,099.90 $80,419.39 $94,215.62 $109,379.78

$2,927,816.62 $3,549,943.89 $4,149,092.83 $4,686,759.37 $5,284,093.04

ForecasOng EBIT (Looking at Historic Trends)

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-  The graph depicted aside shows that EBIT margin has slowly been increasing since 2009. It also shows the forecasted EBIT for 2012 and and 2013. Though the 2012 forecast was dead on, the 2013 forecast wasn’t correct. The EBIT actually stayed at the same level as 2012.

-  We doubt that the margins will get to the 2007 levels within the next 5 years since lower margin products like footwear will be sold in higher quantities. We believe that margins will remain at 11% do to that fact.

-  The price of cotton is at an all time low at the moment we expect the price to appreciate. This will eat into our margins.

EBIT Forecast

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Years 2008 2009 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F

EBIT 76,925 85,273 112,355 162,767 208,695 265,098 $322,059 $390,493 $456,400 $468,675 $475,568

EBIT as a Percentage

of Sales 10.61% 9.96% 10.56% 11.05% 11.37% 11.37% 11% 11% 11% 10% 9%

EBIT Margin Growth As of 2009 6.06% 4.66% 2.91% -0.05% -3.23% 0.00% 0.00% -9.09% -10.00%

We believe that the EBIT margin will stay constant around 11% for the next three years then fall to 10 % in 2017 and 9%in 2018 because we expect shoe sales and the sports accessories segments to conOnue to grow. Those products are relaOvely low in product margin in comparison to apparel. Eventually they will no longer be able to sustain an EBIT margin at 11% due to such high growth in those two segments.

ForecasOng Capital Expenditures

Capital expenditures for 2014 are expected to be around -‐4 % of sales as it’s been previously, in order to support their direct to consumer and internaOonal businesses and further develop and expand their global office footprint. This is going to to be expensive so they are funding there growth with 4% of sales every year to grow steadily at a constant rate. They will also have to conOnue spending on R&D and markeOng to make their products stand out to that of their compeOtors. They should also start thinking about partnerships with technology firms like Nike has done with Apple. We have seen Under Armour akempt to do this with Snapchat my story.

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Year 2006 2007 2008 2009 2010 2011 2012 2013

Capital Expenditures -15,100.0 -34,000.0 -38,600.0 -19,800.0 -30,200.0 -56,200.0 -50,700.0 -87,800.0

Sales 430,689.0 606,561.0 725,244.0 856,411.0 1,063,927.0 1,472,684.0 1,834,921.0 2,332,051.0

Capex as a Percentage of Sales -4% -6% -5% -2% -3% -4% -3% -4%

Year 2014F 2015F 2016F 2017F 2018F

Capex as a Percentage of Sales -3.74% -3.74% -3.74% -3.74% -3.74%

Sales $2,927,816.62 $3,549,943.89 $4,149,092.83 $4,686,759.37 $5,284,093.04

Capital Expenditures -$109,531.06 -$132,805.14 -$155,219.60 -$175,333.97 -$197,680.52

ForecasOng DepreciaOon

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DepreciaOon will trend with sales growth because as they grow they will need to spend more on fixed assets like equipment in order to improve efficiency. We found depreciaOon as a percentage of sales and depreciaOon has consistently been around 2-‐3%, therefore, we used the eight year moving average to figure out the future depreciaOon as a percentage of sales. Then, we mulOplied that figure by the sales to get depreciaOon for that year.

Year 2006 2007 2008 2009 2010 2011 2012 2013

Sales 430,689.0 606,561.0 725,244.0 856,411.0 1,063,927.0 1,472,684.0 1,834,921.0 2,332,051.0

Depreciation 9,824.0 14,622.0 21,347.0 28,249.0 31,321.0 36,301.0 43,082.0 50,549.0 Depreciation as Percentage of Sales 2.28% 2.41% 2.94% 3.30% 2.94% 2.46% 2.35% 2.17%

Year 2014F 2015F 2016F 2017F 2018F Depreciation $76,335.22 $94,003.26 $111,099.99 $123,940.29 $135,416.53

Sales $2,927,816.62 $3,549,943.89 $4,149,092.83 $4,686,759.37 $5,284,093.04 Depreciation as % of Sales 2.61% 2.65% 2.68% 2.64% 2.56%

Non Cash Net Working Capital CalculaOon

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Year 2006 2007 2008 2009 2010 2011 2012 2013

Cash/ Near Cash Items 70,655.0 40,588.0 102,042.0 187,297.0 203,870.0 175,384.0 341,841.0 347,489.0

Current Assets 244,952.0 322,245.0 396,423.0 448,000.0 555,850.0 689,663.0 903,598.0 1,128,811.0

Current Liabilities 71,563.0 95,699.0 133,110.0 120,162.0 149,147.0 183,607.0 252,228.0 426,630.0

Non-cash Net Working Capital 102,734.0 185,958.0 161,271.0 140,541.0 202,833.0 330,672.0 309,529.0 354,692.0

Change in Non-Cash NWC _________ 83,224.0 -24,687.0 -20,730.0 62,292.0 127,839.0 -21,143.0 45,163.0

ForecasOng Non-‐Cash NWC

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Year 2014F 2015F 2016F 2017F 2018F Change in NCNWC $8,308.75 $13,979.55 $14,262.41 $9,438.37 $12,588.56

Sales $322,059.83 $390,493.83 $456,400.21 $468,675.94 $475,568.37 Change in NCNWC %

Sales 3% 4% 3% 2% 3%

Year 2007 2008 2009 2010 2011 2012 2013

Change in Non-Cash NWC $83,224.00 -$24,687.00 -$20,730.00 $62,292.00 $127,839.00 -$21,143.00

$45,163.00

Change in NCNWC % Sales 14% -3% -2% 6% 9% -1% 2%

We used the 5 year moving average of the NCNWC as % of sales to forecast the NCNWC because those more recent years are more indicaOve of the true levels of future change in NCNWC. The future values for change NCNWC as % of sales will most likely be between -‐1% and 3%. We think so because current assets receivables and inventory will increase as sales increase. We think that those values will be slightly higher on average than payable values in the future.

Average Risk Free and Risk Premium Rates

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Years Earnings on S&P Risk Free Rate RM

2003 4.87 4.25 0.62

2004 5.58 4.22 1.36

2005 5.47 4.39 1.08

2006 6.18 4.7 1.48

2007 5.62 4.02 1.6

2008 7.24 2.21 5.03

2009 5.35 3.84 1.51

2010 6.65 3.29 3.36

2011 7.72 1.88 5.84

2012 7.18 1.76 5.42

2013 5.81 3.04 2.77

Average ______________ 3.418181818 2.733636364

Found the average risk premium and risk free rate for the past 10 years using the S&P 500 as the index since UA is an American

stock.

OpOmal D/V and E/V (WACC)

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Name Tot Debt LF Tot CE LF UNDER ARMOUR INC-CLASS A $191,648,000.00 $1,254,141,056.00

NIKE INC -CL B $1,347,000,064.00 $11,105,000,448.00 COLUMBIA SPORTSWEAR CO $18,082,000.00 $1,316,059,008.00

SKECHERS USA INC-CL A $119,620,000.00 $1,050,705,024.00 ADIDAS AG $1,491,484,813.09 $7,726,422,330.14

WOLVERINE WORLD WIDE INC $1,096,600,064.00 $962,099,968.00 DECKERS OUTDOOR CORP $188,014,000.00 $896,006,976.00

HANESBRANDS INC $2,291,502,080.00 $1,464,669,952.00 VF CORP $2,083,523,968.00 $5,862,360,064.00

QUIKSILVER INC $840,748,992.00 $112,192,000.00 PVH CORP $3,907,399,936.00 $4,530,299,904.00

KATE SPADE & CO $408,796,992.00 $70,166,000.00 STEVEN MADDEN LTD $- $685,390,016.00 RALPH LAUREN CORP $510,000,000.00 $4,028,999,936.00

ICONIX BRAND GROUP INC $1,401,783,040.00 $918,404,992.00 CROCS INC $12,973,000.00 $545,208,000.00

TOTAL VALUES $15,909,176,949.09 $41,842,735,658.14 $57,751,912,607.24 D E V

Used the industry D /V and E/V as the optimal D/V and E/V since Under Armour’s D/E fluctuated a whole lot. After calculating it we get a value of 0.275 for D/V and a value of 0.724 for E/V.

BETA

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Regressed returns of Under Armour against that of the S&P 500 in order to get the best beta calculaOon. We did this from 2003 to the present day. We went as far back as possible in order to get the most accurate value. The Adjusted beta is the best beta esOmate of a company’s future beta which is why we will use it for our cost of equity calculaOon. The beta is then 1.357.

Cost of Equity (WACC)

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Rf Beta Risk Premium

3.418181818 1.357 2.73

Cost of Equity 7.122791818

Cost of Debt Interest Coverage ratio of 68.30. This gives UA a AAA rating

which means cost of Debt= Rf+ Spread. As per the table above, the cost of debt is: 3.418%+ 1.25%= 4.67%

WACC CalculaOon

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VARIABLE RATE RATIONALE

Tax 35% Tax rate in the US for corporations id given as 35% in 2013 on KPMG website. We do not expect that to change too much .

Ke 7.12 % Calculated using CAPM on previous slide.

Kd 4.67 % Calculated using interest coverage ratio calculation is on

previous slide.

D/V 0.27547446 Both D/E and E/V were determined using industry averages.

The explanations were shown on slide 27. E/V 0.72452554

WACC= (D/V)(Kd)(1-‐T) + (E/V)(Ke) = ((0.2754)(4.67%)(1-‐0.35))+ (0.724)(7.12%)

= 5.99% or 6%

FCFF CalculaOon

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Year 2014F 2015F 2016F 2017F 2018F Terminal

Growth Rate

FCFF $167,834.30 $201,039.55 $238,278.12 $243,807.31 $234,266.89 2.32%

Year 1 2 3 4 5

Discount Factor 1.0599 1.12338801 1.190678952 1.262000621 1.337594458 Terminal Value

PV $158,349.18 $178,958.25 $200,119.54 $193,191.12 $175,140.45 $4,882,934.81

-‐  Discounted the free cash flow to the present value -‐  Used a terminal growth rate of 2.32% by determining the average GDP

growth rate in the US and Canada in the last 5 years.

Enterprise Value and Stock Price

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(In thousands except per share value )

EV $5,788,693.34

Total Debt 524,387.0

Cash 347,489.0

Market Cap $5,611,795.34

Number of Shares 216,000.00

Price per Share $25.98

The price as of the filing date is about 23.9875. We used this price because we used all latest filing data. We therefore thought it most appropriate to value this firm as of that date.

SensiOvity Analysis (Lower Revenue Growth)

40

Pessimis9c Outlook (45% Probability)

-‐  Decrease revenue growth by 50 % each year off our base case in pessimisOc direcOon.

-‐  Also changes NCNWC, EBIT and all variables affecOng the FCFF calculaOon by 1:1 raOo.

-‐  The new firm value in this circumstance would be about 3.98 billion.

-‐  The new stock price would be $17.63/ share.

SensiOvity Analysis (Higher Revenue Growth)

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Pessimis9c Outlook (10% Probability)

-‐  Increase revenue growth by 50 % each year off our base case in opOmisOc direcOon.

-‐  Also changes NCNWC, EBIT and all variables affecOng the FCFF calculaOon by 1:1 raOo.

-‐  The new firm value in this circumstance would be about 11.6 billion.

-‐  The new stock price would be $52.90/ share.

Relative Valuation

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Preliminary AssumpOons

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-‐  All data used in relaOve valuaOon extracted from Bloomberg terminal.

-‐  All data retrieved respecOve the year ended December 31, 2013.

-‐  All fundamental indicators are latest filing

indicators which is why we used the stock price as of that date as a benchmark to determine whether the company is overvalue or under valued.

Legend

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Legend Colors Point System Range D/E Range for CFs and

Growth

Range for Current Ratio

Altman Z-Score Beta

Average ---------------------------------- -------------------------------- --------------------------- -------------- ------------------- ----------------

Benchmark --------------------------------- -------------------------------- --------------------------- -------------- ------------------- ----------------

Very Similar 3 0-20 0-10% Difference 0.5

difference 0-5.00

Difference 0-0.25

Difference Moderately

Similar 2 20-30 10-20% Difference 0.5 -1.0

Difference 5-10.0

Difference 0.25-0.5

Difference

Not Similar 1 >30 > 20% Difference >1.0

Difference >10 Difference > 0.5

Difference

N/A 0 N/A N/A N/A N/A N/A

-‐  This point system will be our basis for eliminaOng the most irrelevant firms and for choosing the firms that were most comparable to Under Armour. We will use CF MulOples, Growth MulOples and Risk MulOples to isolate for the most comparable firms.

-‐  Ranges for similarity idenOficaOon determined by absolute percentage range difference for CF and growth, absolute value for the range of D/E. Also, absolute differences were used for the rest of the debt metrics.

Comparable Firms

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Name NIKE INC -CL B

COLUMBIA SPORTSWEAR CO SKECHERS USA INC-CL A

ADIDAS AG WOLVERINE WORLD WIDE INC

DECKERS OUTDOOR CORP HANESBRANDS INC

VF CORP QUIKSILVER INC

PVH CORP KATE SPADE & CO

STEVEN MADDEN LTD RALPH LAUREN CORP

ICONIX BRAND GROUP INC CROCS INC

UNDER ARMOUR INC-CLASS A

-‐  Under Armour’s comparable firms. These are the firms in the sportswear and footwear industry. They are basically UA’s direct compeOtors.

-‐  We understand that a similar firm is not one in the same sector necessarily but one that is similar in CFs, Risk and Growth. We however reduced our sample size substanOally by using the direct compeOtors because they would have similar selling prerogaOves and profit moOves.

Cash Flow

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NameROE (%) ROA (%)

NIKE INC -CL B 25.747 15.925COLUMBIA SPORTSWEAR CO 9.359 7.178SKECHERS USA INC-CL A 13.322 8.834ADIDAS AG 10.582 5.368WOLVERINE WORLD WIDE INC 13.711 4.472DECKERS OUTDOOR CORP N/A N/AHANESBRANDS INC 26.548 7.407VF CORP 22.505 12.160QUIKSILVER INC -132.861 -24.380PVH CORP 7.467 2.777KATE SPADE & CO N/A 23.387STEVEN MADDEN LTD 18.640 13.743RALPH LAUREN CORP 18.778 11.892ICONIX BRAND GROUP INC 16.443 5.439CROCS INC -5.134 -1.921UNDER ARMOUR INC-CLASS A 16.617 10.933Average 4.409 6.881

Cash Flow

-‐  Used Under Armour financials as a benchmark to compare other firms: -‐  ROA: want to see how comparable firms are using their assets to generate returns. -‐  ROE: want to see how a comparable firm generates income to share holders.

Growth

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-‐  Growth indicators assessed included 5 Year Revenue Growth, 5 Year OperaOng Income Growth, and EBITDA Geometric Growth.

-‐  Thought it was relevant to look at similariOes in our past growth pakerns to see how closely companies are growing in the same direcOon.

Risk

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-‐  Risk indicators included analyzing the comparable firms’ betas, financial leverage with regards to debt/ equity posiOon, and look at other risk metrics such as Altman Z-‐score and current raOo.

-‐  Wanted firms winth comparable risk levels in terms of capital structure and perceived risk by lending insOtuOon.

IsolaOng for the Most Comparable Firms

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-‐  The most comparable firms were the ones with the most points.

-‐  The summaOon of points lead us to eliminate a few firms and keep four comparable firms.

-‐  4 firms remain arer the point system. Then, we conducted a weighted average based on relaOve point score and use that to find the jusOfied P/E raOo.

Chose P/E RaOo as a MulOple

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-‐  We chose P/E because it is a mulOple that makes it easy to tell whether a stock is overvalued or undervalued.

-‐  We then used Algebraic rearrangement to forecast the stock price of UA based on their 2013 year ended earnings report.

Name Points P/E Weighted Average P/ENIKE INC -CL B 22.000 24.06625 5.882861111COLUMBIA SPORTSWEAR CO 21.000 20.441515 4.769686833SKECHERS USA INC-CL A 23.000 20.673409 5.283204522STEVEN MADDEN LTD 24.000 16.52529 4.406744Total Points 90.000 20.34249647

-‐  We have a JusOfied P/E RaOo of 20.3424

-‐  We have a Net Income of about $162.3 million.

-‐  Therefore the share price is $15.67

Reconciliation

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Reconciling (Arriving at one Price)

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OpOmisOc Share Price= $52.90/share (10% probability)

Base Share Price= $23.98/share (40% probability)

New Share Price

We constructed a probability tree for the three growth probable scenarios found using DCF and also using our relaOve valuaOon. Given what we know about the future of the industry and the fact that this is a highly compeOOve space, we found it more likely that the pessimisOc approach will occur instead of the opOmisOc. We then assigned both the base projected share price calculated on DCF and the pessimisOc calculated price using sensiOvity analysis and assigned them both probabiliOes of 40% of occurrence because they are two equally likely scenarios since the industry is so compeOOve. We then assigned the top value (the opOmisOc value) a 10% likelihood of occurrence as well as the bokom value which ends up being our relaOve valuaOon the same likelihood value of 10%. Every stock has a market component that should affect its value. This is the relaOve valuaOon it it is what the market thinks the stock should be worth based on the prices of similar firms in the industry.

PessimisOc Share Price= $17.63/ share. (40% probability)

RelaOve ValuaOon Price= $15.67$/ share (10% probability)

Final Price

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-‐  We are strong believers in market inefficiency. We believe that investors can beat the market by value invesOng. However, we do believe that the market outlook on the stock does have an effect on the stock price which is why we included the conducted relaOve valuaOon into the probability tree on the previous page.

-‐  To find the final price we then take the probability of occurrence of each those strands in the probability tree and mulOply it by the stock price and add them up.

-‐  We then get a final stock price value of : -‐  Final Price= (40%)*(17.63)+23.98*(40%)+15.67*(10%)+52.9*(10%)

= 7.052+9.592+1.567+5.29 = $23.501/ share

RecommendaOon (Conclusion)

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-‐  We will use the adjusted closing price of December 31st 2013 to determine whether UA is over valued or undervalued. We used the adjusted closing price because it gives me an accurate representaOon of the firm’s equity value a value that is beyond the market value. The adjusted closing price is $24.27, (market price: $ 48.53). Our valuaOon gives us a stock price of $ 23.50 which means that UA is overvalued . Therefore, we recommend shorOng or selling all of your UA holdings.

Average 26.50673423

UNDER ARMOUR INC-CLASS A 80.499542 NIKE INC -CL B 24.06625 COLUMBIA SPORTSWEAR CO 20.441515 SKECHERS USA INC-CL A 20.673409 ADIDAS AG 19.858585

WOLVERINE WORLD WIDE INC 17.88728 DECKERS OUTDOOR CORP HANESBRANDS INC 21.182058 VF CORP 22.468246 QUIKSILVER INC PVH CORP 17.11141 KATE SPADE & CO 42.862213 STEVEN MADDEN LTD 16.52529 RALPH LAUREN CORP 19.645685 ICONIX BRAND GROUP INC 21.366062

-‐  The table depicted to the ler shows the P/E RaOo for all the firms in the industry.

-‐  UA is clearly over valued because investors are currently paying $80 per dollar of earnings compared to the industry average of 26.

-‐  This table backs up my point that this stock should be sold short because it will inevitably decline.

UA Equity Valuation Examination (Sample Project)

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