Under Armour Shorts

Under Armour: Overpriced

But like the company's clothing, such ambitious growth doesn't come cheaply. Under Armour's stock (ticker: UA) has rallied about 130% in the past year, to a recent 78, and is up a whopping 533% from its March 2009 low of 12.33. Shares trade for 45 times this year's expected earnings of $1.73 a share, while enterprise value (market value plus net debt) is 20 times greater than earnings before interest, taxes, depreciation and amortization, or Ebitda. That's almost twice the ratio of rivals.

Even in a strong market for sports-related apparel, that is a lot to pay, especially for a company that faces increasing competition and rising costs for commodities and labor, which could crimp profit margins. Moreover, despite its efforts, Under Armour has yet to translate its white-hot success in performance apparel to traditional athletic footwear. Nor has it expanded internationally as quickly as expected. As a result, concerns about near-term growth are hard to wick away. Some analysts see the stock falling to the mid-60s in the next year.

UNDER ARMOUR MADE ITS NAME —a now-popular one with professional and college athletes—by inventing compression apparel, whose synthetic fibers lift moisture from the skin and allow it evaporate, thus enhancing comfort and performance. CEO Kevin Plank launched the business by peddling his sweat-busting outfits mainly to college athletes. The company earned about $69 million last year, or $1.34 a share, on revenue of $1.06 billion, and is expected to earn $2.17 a share, on revenue of $1.7 billion, in 2012.

Apparel sales, up 31% last year, chipped in 80% of total revenue, with footwear contributing 12% and accessories and licensing, 8%. Footwear sales slipped 6%, however, to $127 million, with Morningstar noting that a mixed reaction among customers to the company's "under-engineered" and pricey kicks led to markdowns at retailers. Under Armour's wholesale business accounted for 73% of 2010 sales, while the direct-to-consumer business, consisting of more than 70 company-owned stores, generated 23%. International sales were less than 10% of the total.

Under Armour's lofty valuation has set the bar high, and the company tripped over it in April. Shares tumbled 10% near the end of the month after the company reported a 64% leap in first-quarter earnings on a 36% revenue gain. But it said gross margins this year could be one percentage point lower than 2010's, owing to rising cotton prices and higher labor costs in China. Also, the company brought its previously licensed accessories business in-house, and noted that footwear margins are lower than those on apparel.

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