Under Armour Gets Another Direct Lift in Q1

 

More important than the fact that we grew our apparel business 31% this past quarter is the fact the strength was so broad based, said Under Armour Chairman and CEO Kevin Plank during a conference call with analysts. There was strong growth in all of our categories: men’s, women’s, and youth. There was strong growth with our wholesale partners… And there was strong growth across all categories in our Direct-to-Consumer business…

 

Revenues were largely driven by apparel with growth coming from the men’s, women’s, and youth apparel businesses.

 

The direct-to-consumer business represented approximately 18% of UARMs net revenues for the quarter and was driven by Under Armour Factory House stores and the companys Web business. UARM opened four outlet stores during the first quarter and has opened two additional since then.

 

Reaching new Under Armour consumers where they shop is the driving force behind our strategy and were very encouraged by our efforts over the past 12 months. We know there is much more opportunity out there to meet growing consumer demand, explained Under Armour President David McCreight.

 

Under Armour anticipates opening a total of 16 to 18 new Factory House stores in 2010. Management said that the retail business model is different from its traditional wholesale model. Retail delivers higher gross margins, but also requires higher SG&A investments. These investments will cause Under Armours SG&A growth rate to exceed the companys top-line growth in 2010, with the largest impact on a percentage basis occurring in the second and third quarters.

 

Footwear net revenues were down approximately $14 million to $43 million in the first quarter.  According to Plank, Under Armours next major push in footwear will clearly be in basketball.                                 

 

With one player and two brands owning more than 90% of the market share in [the basketball] business, we anticipate when we enter to take significant market share, said Plank. And you can define significant in any way, but the fact is that we are gaining mind share with the consumer today. There is a demand. There’s a pent-up demand. People are talking about our basketball footwear.

 

Accessories and licensing revenues also experienced strong growth in the first quarter and increased 30% and 25%, respectively. Beginning in 2011 Under Armour will be developing, designing and selling headwear and bags in house. Currently this is a license business. The company is investing in new personnel to develop these categories and expects to have better cross merchandising between apparel, footwear, accessories, headwear and bags as a result.

 

Plank indicated that Under Armour has had great success in football and baseball, but that the non-cleated business has been more challenging. We continue to invest in our footwear team to insure that our strength in on-field footwear will translate into an equal degree of success in categories such as running, training and basketball.

 

International net revenues were also up substantially in the first quarter and represented approximately 6% of revenues. Plank said that he believes the International business remains our biggest single untapped growth driver. Under Armour has seen success in Europe with its cold weather gear and broader success in Japan where it has a $100 million business. Plank described the Soccer market as The ticket to the global stage and of course a place where youll see us playing on a much bigger level…

 

Under Armour is currently seeding soccer product to athletes. Plank described their current efforts, Weve been in the soccer business and…we are seeding product as much as anything. Our price points were $150 and up and really trying to get in the game with that high-end player and athlete. And weve done that with the way that we launched in Europe. And it’s really — it’s more of a player or product launch at the highest levels than it was at the retail level. Youll see us begin to commercialize that in the near future. We expect to be an important player in soccer.

 

Plank also said that he is impressed with the momentum behind the toning and shaping footwear product in the market, but does not expect Under Armour to go in that direction.

 

Under Armours gross margins were impacted by several different forces. Apparel gross margins were up during the quarter due to a favorable product mix, as well as improved costing, accounting for a 130 basis point increase. There was also a strong rate of growth in the higher-margin Direct-to-Consumer business, accounting for a 90-basis point gain. These items were partially offset by lower gross margins in the footwear business which accounted for a 75 basis point decrease. Total apparel and footwear had a 60 to 65 basis point negative impact on gross margins due to liquidation.

 

SG&A expenses as a percentage of sales increased 40 basis points for the quarter. As a percentage of net revenues, marketing expenses were down and accounted for 13.6% of net revenues in the first quarter compared with 16.8% in the prior year. Selling costs increased primarily due to the continued expansion of Under Armours Factory House stores. Product innovation and supply chain costs also increased due to investments in design and sourcing personnel.

 

Operating income during the first quarter increased 72% compared to the first quarter last year with operating margins at 6% compared with 4% in the prior-year quarter. This all added up to an 81% increase in net income and a 75% increase in diluted earnings per share.

 

The company also ended the quarter with a strong balance sheet. Total cash and cash equivalents at quarter end increased 153% to $166 million compared to $66 million at the end of last years first quarter.

 

Under Armour currently has no borrowings outstanding on its $200 million credit facility.

 

Inventory at quarter end decreased 10%, driven by increased demand and managing excess inventory through liquidation sales to third parties. Looking ahead, UARM will be increasing safety stock in key core programs and this is expected to result in a year-over-year increase in inventory beginning with the second quarter.

 

Previously Under Armour provided 2010 guidance for net revenue growth in the range of $945 million to $960 million, an increase of 10% to 12% over 2009. Diluted earnings per share were expected to grow in-line with that revenue growth. Based on Q1 results UARM raised its outlook and now expects 2010 annual net revenues in the range of $965 million to $985 million, an increase of 13% to 15% over 2009. Under Armour also expects 2010 diluted earnings per share for the full year in the range of $1.05 to $1.07, an increase of 14% to 16% over 2009.