Powered by a strong reception to its Charged Cotton collection, Under Armour Inc. posted a higher-than-expected quarterly profit and once again raised its revenue and earnings forecast for the year.


Revenues for 2011 are now expected to finish in the range of $1.42 billion to $1.44 billion, an increase of 33 percent to 35 percent over full-year 2010.  UA is forecasting operating income in the range of $155 million to $160 million, an increase of 38 percent to 42 percent versus last year. Previously, Under Armour had anticipated year-end revenues in the range of $1.37 billion to $1.39 billion and operating income in the range of $149 million to $153 million.


Second quarter revenues jumped 42.2 percent to $291.3 million and net income catapulted 77.1 percent to $6.2 million, or 12 cents a share, from $3.5 million, or 7 cents, in the year-ago quarter. Analysts on average had expected the company to earn 8 cents a share, on revenue of $273.44 million, according to Thomson Reuters
“First and foremost our brand and product have never been stronger,” CEO Kevin Plank stated in a conference call with analysts.


Apparel revenues climbed 36.4 percent to $204.8 million, driven by broad-based strength across each of the Men’s, Women’s, and Youth apparel businesses. The quarter represented the category’s highest quarterly growth rate since the third quarter of 2007. The gains were led by the strong introduction of Charged Cotton. The Charge Cotton program remains on track to generate approximately $60 million of revenues in 2011. The next phase of the program, Storm Fleece, launches in September.


Footwear revenues increased 31.0 percent to $46.9 million, with growth predominantly driven by running product and led by the Assert product and initial sell-in of some back-to-school product.


Accessories revenues more than tripled to $32.4 million in Q2 from $8.9 million in the prior year’s period, primarily driven by the transition of the companys previously licensed hats and bags business to an in-house business in January 2011.


Hats and bags are now expected to contribute an incremental $70 million of revenue in 2011, up from prior guidance of an incremental $60 million for the year.


Direct-to-Consumer (DTC) revenues, which represented 27 percent of total revenues for the quarter, grew 81 percent year-over-year. Nine factory stores opened during the quarter, increasing the companys factory base to 72, up from 45 at the end of last year’s second quarter. UA expects to open approximately seven additional factory stores in 2011, bringing the total door count by year-end to 79 stores. The first hybrid store model will open this October. E-commerce sales “remains strong,” driven primarily by higher traffic and conversion rates year-over-year, according to CFO Brad Dickerson. A new Web platform will go live this fall.


International revenues increased 58 percent to $14 million in the quarter and represented approximately 5 percent of total revenues. Growth was driven primarily by the EMEA region.


Licensing revenues declined 27 percent to $7 million, driven primarily by the transition of the hats and bags business in-house and the year-over-year pressure with the licensing business in Japan due to the March earthquake and tsunami.


Gross margins eroded 250 basis points to 46.3 percent of sales. In apparel, less favorable product mix, input costs and sales allowances negatively impacted margins by 160 basis points. A lower mix of licensing revenues pulled down margins by approximately 120 basis points. Partly offsetting these factors was a 45 basis point benefit from strong growth in its higher-margin direct-to-consumer business.
SG&A expenses were reduced to 42.4 percent of sales from 45.4 percent in the prior year’s period, reflecting leverage of corporate services and marketing expenses.


Inventory at quarter-end was up 74 percent to $311.1 million, reflecting a previously-stated intention to increase inventories to better service anticipated consumer demand in 2011. The inventory gain also reflects the transition of the company’s hats and bags business in-house and an earlier planned build of ColdGear apparel for the 2011 Fall/Winter season.


On the call, Plank reiterated that Charged Cotton nearly quadruples Under Armour’s 2010 addressable market in apparel from the previous $3 billion market size to the more than $11 billion active use market, while “continuing to blur the lines of the much larger $58 billion activewear market over time.” But he added that the strength across core apparel such as baselayer and training at full-prices in the quarter shows Under Armour “continues to lead the industry in share, ASPs, and most importantly, innovation.”


Regarding footwear, the company is looking to build the same level of authenticity with runners as it has with football and baseball players. Said Plank, “We know it takes time to build that credibility as we enter each new category but we are going about it in an authentic and surgical way.”


Back-to-school will mark Under Armour’s first brand campaign centered on footwear and features many of the companys top athletes, including Tom Brady, Cam Newton and UFC fighting Champion Georges St.-Pierre.
The Micro G cushioning technology will launched with two new running shoes, the Split and the Charge RC. Exclusive running product is being introduced at Foot Locker and The Finish Line to help differentiate the brand in the mall.


In basketball, Brandon Jennings signature shoe will launch in Q4 featuring the Micro G technology. UAs newest endorsers, Kemba Walker of the Charlotte Bobcats and Derrick Williams of the Minnesota Timberwolves, both top-10 picks in the recent NBA draft, will also be wearing UA product this season.


Plank said growth in footwear and accessories is enabling the brand to offer a significantly wider breadth of product in their DTC businesses. But he also said UA’s retail learnings are inspiring improved presentation at wholesale accounts.


This summer, a new in-store concept, All American Shops, launches at Dick’s Sporting Goods featuring more efficient fixtures and “the capacity to tell great head-to-toe product stories,” Plank said. Fifty such shops will be installed by the close of the year with a more aggressive rollout in 2012. The top-level shop, Blue Chip All Americans, will feature interactive digital centers and a larger floor space. The first Blue Chip concept is being installed at DSG’s Roosevelt Field store on Long Island.
At Sports Authority, an Armourville 2.0 concept is being introduced in 100 doors by the end of this year.


In all, UA will be enhancing its presentation of more than 700 new shops over its existing distribution over the next 12 months. Combined with the next generation of its e-commerce site which debuts this fall and the improvements at its own retail stores, Under Armour expects to impact the retail presentation of over 50 percent of its revenues.
One surprise to the improved guidance to Wall Street was that Under Armour now expects gross margins in 2011 to decline approximately 160 to 180 basis points compared to its previous guidance calling for a 100 basis point drop.

 

Management had indicated that margins would be pressured by transition of its hats and bags business from a licensing business as well as near-term challenges around apparel and footwear sourcing costs. But UA said it is now facing higher sales allowances as it has “not optimally serviced our wholesale accounts” as it has continued to chase demand this year. Gross margins in its factory channel will also be lower than initially planned due to a higher mix of sales from lower margin close-out product. The greatest year-over-year gross margin pressure is expected to occur in the third quarter with declines expected to moderate in the fourth.


On the upside, its top line growth is helping Under Armour better leverage SG&A expenses. Marketing expense, for instance, is expected to be approximately 11.3 percent to 11.5 percent of revenues – down from its prior guidance of approximately 12 percent of revenues-despite increased investments to support the new footwear campaign, expanded basketball investments, in-store shop builds, and co-branded holiday commercials.


Plank also reiterated its goal stated in June to double revenues from 2010 to 2013.