Under Armour Looks to New Channels and Outlet Business to Boost Revenues

Under Armour, Inc. posted pretty solid results for the fourth quarter, but Wall Street was less than receptive to management’s strategic vision for hitting the numbers required to offset the loss of the non-cleated footwear business in 2010.  Whether it was the fact that Under Armour is putting far more eggs in its owned-retail outlet business — they will increase outlet door count by 40% in 2010; or it was the little nugget about their move down-market this year — they are opening Northwest discounter Fred Meyer — analysts seemed to have more questions about the future than about the strong results posted for the fourth quarter.

 

UARM reported that revenues jumped 24.0% in the fourth quarter to $222.2 million from $179.3 million in the year-ago period. Apparel revenues increased 26.0% to $192.1 million from $152.4 million in Q4 2008, which management said was driven by growth in men's, women's, and youth apparel.  Footwear revenues declined 5.1% to $8.7 million in Q4 compared with $9.2 million in the prior year quarter.  But the growth prize went to the company’s Direct-to-Consumer business, where net revenues grew 52.9% year-over-year during the fourth quarter.  The gains seen in the direct business, which is comprised of the company’s Internet, full-price brand stores and outlet stores, apparently boosted growth in all the product categories.  The company does not break out wholesale sales figures.

 

 

Under Armour finished the year with 35 outlet stores and plans to open another 15 stores in 2010, which company President David McCreight said was an “appropriate number for a brand that is approaching $1 billion in sales.”  He indicated that the “number of stores will continue to grow over time as the channel evolves.”

 

Management indicated that the Direct business was 18% of the total sales volume for the year, which, based on the percentage increase, would compare to roughly 14% of the business in the prior year.

 

The Direct business also had the expected impact on gross margins and SG&A expenses.  Fourth quarter gross margin improved 70 basis points to 51.4% of sales,  compared with 50.7% in the prior year's quarter, due almost entirely to the increased higher margin sales in the Direct business.  SG&A expenses were up as a percent of sales — again primarily driven by higher personnel costs and continued investments in the Direct-to-Consumer business.  SG&A expenses expanded 130 basis points to 39.3% of net revenues Q4, compared with 37.9% of net revenues in the same period of the prior year.  Marketing expenses for the fourth quarter were 10.8% of net revenues versus 11.0% in the prior year's period.

 

Fourth quarter operating income grew 17.8% to $26.9 million compared with $22.9 million in the prior year's period.  Net income jumped 82.7% to $26.9 million, or 30 cents per diluted share, in the fourth quarter, compared to $22.9 million, or 17 cents per share, in the year-ago period, helped in large part to a $4.3 million differential in the “other expense” line.

 

McCreight went on to explain the reasoning behind the brand’s move into Fred Meyer stores in the Northwest, indicating that in looking at areas where athletes are being underserved they found areas where their current retail partners don't fill in those gaps.  Company Chairman and CEO Kevin Plank said that there are consumers who have heard of Under Armour that haven't had the access to the product. “So making sure that we can be in the places where our consumer shops, because frankly they are not shopping in some of the current places that we are selling today,” said Plank.

 

Thanks to an expanding outlet business and the colder weather this winter-the company has made solid progress on clearing up the inventory overhang that has plagued it the last couple of years.  Inventory at year-end decreased 18.5% to $148.5 million compared with $182.2 million at 2008 year-end.  Cash and cash equivalents increased $85.3 million to $187.3 million at December 31, 2009.

 

Looking ahead, UARM expects 2010 annual net revenues in the range of $945 million to $960 million, an increase of 10% to 12% over 2009.  The updated outlook is an increase over the previous forecast of growth of high-single digits to low-double digits.  EPS growth is expected to be in line with revenue growth. Under Armour has no footwear launches planned for 2010 and will focus primarily on its cleated business.