Under Armour Beats the Street in Q3, but Fourth Quarter Outlook Spooks Many

 

Even CNBC’s Jim Cramer got in the act and highlighted the company in his “Outrage of the Week” segment, actually accusing the company of trying to “hoodwink” analysts and investors.  Shares settled down a little after the rise and fall, eventually settling into a 14.8% decline for the week to close at $26.85 on Friday, or roughly twice the decline for the SportsOneSource Sporting Goods Industry Stock Index for the week.

Revenues increased 16.2% to $269.5 million in the third quarter, but apparel revenues rose just 7.1% to $215.4 million for the period, while footwear revenues jumped 153% to $33.0 million, mainly driven by shipments of running footwear for the back-to-school season, and accessories increased 21.0% to $10.8 million.  But the apparel number is also helped by the direct-to-consumer business, which grew approximately 62% for the third quarter through a combination of more outlet stores and Internet sales, and the growth in international sales, which jumped 53% for the quarter.  Direct-to-consumer represented 15% of total revenues for the quarter, up from roughly 11% in the year-ago period.

Management said 45% of the incremental revenue growth in Q3 came from wholesale footwear, with another 41% of that incremental growth coming from the direct-to-consumer business. The dollar growth in women's was the strongest of the three pieces of the wholesale apparel business.

Given the cold, wet weather of late, and the shortage of inventories at retail, the current landscape would appear to favor Under Armour.  According to retail point-of-sale data compiled by SportScanInfo, Under Armour added about 70 basis points of share in overall sport apparel for the trailing four-week period in the sports retailer retail sector — and added 240 basis points of share in the performance apparel business over the same period.

However, the company may not be able to capitalize on the opportunity created by the very early winter trends. Company CFO Brad Dickerson cautioned that based on inventory management, there be a limit to how much upside they have in the fourth quarter.

The company is pulling back on its plans for footwear as well after the experience with running footwear this year and the addition of a new footwear chief in Gene McCarthy — formerly of Timberland, Reebok and Nike.  Company president David McCreight suggested on a conference call with analysts that they will be working to position the running footwear business for the improved product they see coming as soon as 2011. He said they are planning their running footwear business conservatively in 2010 and, as such, 2010 plans do not assume growth in the overall footwear business.

Gross margins decreased 130 basis points to 49.7% of sales for the quarter, which was impacted negatively by the liquidation of excess inventory to third parties and increased inventory reserves on obsolete seasonal products, offset a bit by “strong revenue growth” in the higher margin direct-to-consumer business and decreases in their reserve for sales allowances and discount incentives for wholesale customers. 
Dickerson said that excluding the liquidation sales, they would have still achieved a double rate of growth in the quarter.

SG&A expenses grew 21.2% year-over-year, or a 130 basis point increase to 32.3% of sales for the period.  Dickerson said the year-over-year increase in SG&A was primarily driven by expansion of factory house outlet stores as well as investments made in the apparel and footwear teams.

The resulting net income inched up 1.9% to $26.2 million, or 52 cents a share, from $25.7 million, or 51 cents, in the year-ago period.
Net accounts receivable decreased 4% on a year-over-year basis, far below net revenue growth for Q3. Management attributed the improvement to a “strong performance” of their collections team, but also acknowledged that part of the A/R improvement came from the higher mix of direct-to-consumer sales.

Inventory at quarter end decreased 6.6% year-over-year to $152.8 million.

Looking ahead, UA now estimates full-year net revenues to be in the $830 million to $835 million range, an increase of 14% to 15% year-over-year. This compares to previous outlook of approximately $810 million.  Based on the year-to-date numbers, the forecast would appear to assume a revenue increase of under 12% for the fourth quarter.