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Under Armour Q208 Earnings Roundup: Buy on any Pullback

Posted on: July 29, 2008 - Email Article - Printable Version

Vinay Ayala

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Under Armour [UA: 25.76, 0.00 (0.00%)] reported very good Q208 earnings today and after reading the conference call I have full confidence that their growth will be realized well into the future. Taking a quick look at the numbers, net income fell YoY to $1.38 million, which represents $0.03 per share, from $5.7 million ($0.11 per share). However, this was still higher than Wall Street’s expectations, which was $0.01 per share. Revenues increased 30% in the quarter and the company raised its net income from operations outlook to $104.5 million - $105.5 million from $103.5 million -$104.5 million. The company expects the back half of the year to continue to be the strongest, as we approach the back-to-school and holiday season. Gross margins fell 370 basis points, but this was attributed to higher costs associated with the launch of their Performance Training line.

Very Strong Going Forward

The conference call painted a very positive picture for Under Armour not only for the back half of 2008, but well into 2009 as well. The strong results this quarter was due to the successful launch of their Performance Training footwear, which the company stated “was everything they had hoped it would be.” The company also stated they would be launching a Generation II Performance Training footwear line in November, which should continue to drive this business in the back half of the year. They also said that they will be moving into more Foot Locker’s this year as they expand their exposure to the retail footwear market, which is very positive as Foot Locker attracts a large number of consumers in this business. If you remember, I stated that I would need visibility on this business going forward because its success would drive future growth and with the extremely successful launch of the line, the company stated that they would be moving into the running footwear business at the beginning of 09. This is a huge step, which not only confirms their successful launch into the training business, but leads me to believe that they will be just as successful in launching the running line, as they have a business model that works in the footwear industry. They implied that the running footwear launch would be even larger than the Performance Training launch.

Under Armour still has a lot of areas to move into, which is why they are such a prolific growth story, and they confirmed their intentions of moving further into other markets, by announcing that they would be making a much more concerted effort to move into the basketball apparel and footwear industry, which has huge potential. This continued expansion into more areas of the athletic industry will propel UA as one of the premier sports apparel companies in the world.

Thats right, the world. As I stated previously, I wanted more visibility towards their international business and I got that from their results this quarter. Previously US sales made up 95% of sales for Under Armour, but this quarter that decreased to about 90%, as the company had much better international sales, which should help given the state of the US economy. They noted strong growth in Europe as they have been able to successfully sponsor a couple of teams there. They also noted that revenues in Japan would double from 2007 to 2008. Clearly international sales should continue to grow as they continue to diversify their portfolio of product offerings.

Another very encouraging story was the continued growth of their Direct to Consumer business, which consists of their online sales, retail call centers and specialty retail stores. They announced that they have opened up another specialty retail store in Chicago and will open their third store later on this year. Overall the Direct to Consumer business grew at a rate of 75%! This part of the business continues to blow away the company’s expectations and they reiterated that this business sees its best performance in the back half of the year due to increased sales during the holiday and back to school season online.

Apparel sales were up only 10% because some sales were accrued to the 1st quarter due to the earlier shipping of some models. The women and youth segments still noted strong growth rates of over 25% as the company continues to gain significant market share in these areas. They still reiterated their over 20% growth rate for the apparel, as there should be increased demand for these products during the back half of the year, especially if it is a cold winter.

Now the main concerns were related to the gross margin which fell 370 basis points. This was mainly due to the increased SG&A and marketing costs associated with the new Performance Training launch. Also, since footwear is typically a lower margin business, with this being their first foray into the footwear business, they had to ensure that they put out a quality product to make sure they had the appeal to consumers. With the development of brand recognition in the footwear industry, they expect margins to increase in this segment over time as they gain more expertise in this area.

Recommendation

Given the increased visibility from the company on their international growth and success of their Performance Training line, I would now recommend buying in at any pullback, which could occur after Friday’s unemployment report, which is expected to show a higher unemployment rate. The company stated that they remain positive that they will be able to maintain sales figures given the current condition of the retail market. They weathered the storm this quarter and from what they have been told by retailers about consumer volume, they should be able to maintain their sales throughout the back half of the year. Shares saw a nice little pop today and over time there could be a short squeeze on this stock as there are over 15 million shares short on this stock. I think that any type of pullback especially into the $26.50 and below range will offer a compelling value for investors looking for a solid growth story going forward, as the company should continue to challenge Nike [NKE: 53.44, 0.00 (0.00%)] and Adidas for market share going forward.

-Vinay Ayala

Disclosure: The mutual fund that the author is associated with is long NKE

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