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Why Under Armour Expects to Take on More Debt to Fund Growth

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Capital expenditure and investments

As we discussed in the previous articles of this series, Under Armour (UA) is expecting to significantly grow both its top and bottom lines over the next few years. Both sales and operating income are projected to increase at a CAGR of over 20% over 2014–18.

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Capital expenditure to increase

UA also expects to spend more on capital expenditure or CapEx to fund the growth. Its CapEx as a percentage of sales has been rising over the past few years. It’s risen from 2.8% of sales in 2012 to 4.6% of sales in 2014. In the next few years through 2018, the company expects to spend as much as 8%–10% of sales by way of CapEx. This consists of:

  • 3%–3.5% on ongoing support investments
  • 1%–1.5% on revenue drivers
  • 4%–5% on capacity enhancements

Peer group comparison

UA’s relative CapEx levels over the next few years would be the highest among UA’s peers. Even Lululemon Athletica (LULU), with its vertically integrated model, typically spends 6%–7% of sales on capex. Other high-growth companies in the industry, like Nike (NKE) and Skechers (SKX), spent 3.1% and 2.4%, respectively, in their last fiscal years.

However, UA’s growth rate has historically been the fastest among the peer group considered, and this looks set to continue. Besides, most of these investments are long-term, with the benefits likely to come in over several years.

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Debt financing

Under Armour expects to employ leverage to fund some of its growth investments. According to comments by Brad Dickerson, UA’s chief financial officer, “We’ll look to both increased debt levels to support this business growth and shift to more of a long-term fixed rate. With that, we expect our interest expense to get a little bit higher over the next few years.”

UA had about $0.7 billion in debt on its balance sheet as of June 30, 2015. Most of it was assumed to fund the company’s purchases of fitness app firms Endomondo and MyFitnessPal over the last 12 months.

Coverage ratios

UA’s net debt–to–EBITDA[1. Earnings before interest, taxes, depreciation, and amortization] ratio at 1.2x is higher compared to activewear peers Nike (NKE) and Lululemon Athletica (LULU) but lower than other apparel firms like Hanesbrands (HBI) at 3.7x and L Brands (LB) at 1.6x. It’s also lower than the S&P 500 Consumer Discretionary Sector Index (XLY)(FXD) at 1.3x.

For more sector updates and analysis, please visit our Consumer Discretionary and Retail page.

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