Under Armour Shares Dip Despite Record Quarter…

Under Armour, Inc. posted very solid gains in the 2006 fourth quarter and increased its guidance for 2007, but the company got a hard cold lesson in the sometimes illogical behavior of the public market as it missed Wall Street’s bottom-line expectations for the quarter by a penny. A 2007 forecast that sees earnings growing at a slower pace than sales didn’t help either. The result was an 8.5% decline in UA shares for the week to close at $45.80 on Friday.

The company reported that net revenues jumped 55.0% for the fourth quarter to $135.3 million from $87.3 million in the year-ago period. Apparel revenues were up 43.2% for the period to $117.9 million from $82.3 million in Q4 last year and new initiatives in baseball and softball cleated footwear added another $9.3 million for the quarter. Accessory sales were up 66.6% to $9.8 million from $5.5 million in the 2005 period. Licensing revenues were up 59.0% to $4.7 million for Q4, compared to $2.9 million last year.

The men’s business added the most volume for the period, but the women’s and youth businesses posted more percentage growth in the quarter. Revenues in men’s rose 36.7% to $82.1 million from $60.1 million in the year-ago period, while the women’s business was up 56.1% to $26.1 million from $16.7 million in Q4 last year and youth revenues jumped 75.9% to $9.8 million from $5.5 million in the year-ago period, thanks in part to the launch of a girl’s apparel offering.

Kevin Plank, company chairman and CEO, said that the top 20 styles in the compression and training categories, comprised of 20 tight and 20 loose styles, accounted for 60% of the total revenue in men's apparel. The categories accounted for 70% of the women’s business. Overall product distribution changed from a mix of 65% compression to 35% loose product in 2005 to approximately 55% compression and 45% loose in 2006. The overall women’s business represented 20% of total sales in 2006, compared to 13% of sales in 2005.

Net sales from company’s direct-to-consumer business, which includes Web site and retail outlet stores, grew 118% for the quarter and 87% for the year, growth that had a positive impact on gross margins.

The direct business represented approximately 5% of total revenues last year, but they see it “anywhere from 6% to 7%” going forward. Under Armour’s outlet store base remained at 11 stores in Q4, but they plan to add five to six outlet stores this year.

Despite the inclusion of lower-margin cleated footwear sales, gross margins were up 190 basis points to 50.6% of sales in the fourth quarter, compared to 48.7% of sales in the fourth quarter last year.

SG&A expenses were up 350 basis points to 37.5% of sales in Q4 from 34.0% of sales last year, thanks in large part to a sharp increase in marketing expenditures during the period. Fourth quarter marketing expense was 12.6% of net revenues versus 8.6% of net revenues in Q4 2005. The company’s marketing expenditures for the year were still in the target range of 10% to 12%, coming in at 11.2% of sales.

Fourth quarter net income increased 69.4% to $11.9 million, or 24 cents per diluted share, compared to net income of $7.0 million, or eight cents per diluted share, in the 2005 fourth quarter. Net income for Q4 and the year got a $1.0 million, or two cents per diluted share, boost from state tax credits.

Mr. Plank said that total global door count reached nearly 12,000 by year-end. Doors in Europe expanded to 600 in 2006, a number the company expects to more than double in 2007.

Management said that 90% of the inventory at the end of the year was current and future inventory and the balance was earmarked 100% for their retail outlet stores.

Looking ahead, Under Armour sees top- and bottom-line growth for 2007 outpacing previous long-term growth targets. Management said they see revenues and operating income growing in the range of 30% to 35% for the current year, compared to the 20% to 25% long-term expectations. UA now sees 2007 net revenues in the $560 million to $580 million range, while income from operations is expected to be in the range of $74.5 million to $77.5 million. The tax credits realized in 2006 are expected to impact the year-over-year comparability of EPS and net income for the second half and full year 2007.

Management said they expect revenues in the men's business to grow at a greater rate than the long-term target as well, while the other businesses are expected to grow at “an even faster pace.” Footwear and international are projected to contribute almost 20% of the year-over-year dollar growth in 2007 for Under Armour. The higher-margin global direct-to-consumer businesses are forecast to grow at a faster rate than the overall business, which is expected to aid in gross margin growth for the year, but gains will be offset in part by continued growth in the cleated footwear business, an impact they see most evident in the first quarter.

The company is also expecting to pick up 60 to 70 basis points in gross margin as they shift some discount dollars to in-store marketing initiatives, especially in their larger accounts, but that will be offset by an increase in marketing expenses in the SG&A line. The retailer apparently has the option to invest the dollars or take the discount.

Under Armour is planning that full year gross margins will improve by 80 to 100 basis points over the prior year, while marketing expenses are seen at the high end of the planned 10% to 12% range.

The company will expand its footprint in the outdoor categories this year with the launch of new outerwear product that debuted during (but not at) the winter shows.

Under Armour will have outerwear “engineered” for the ski and snowboard athlete and the hunt and fish categories on the floor for Fall’ 07. The outerwear launch will be coupled with a packaged baselayer program featuring exclusive Under Armour fabric in light-, mid-, and heavyweight offerings. The launch will include 100 new styles in the outdoor category over the next 12 months through “strategic specialty distribution.”

The outdoor specialty business through accounts like REI, Cabela’s and Bass Pro grew in “high-double-digits” in 2006
The company also sees an opportunity for larger, broader categories of non-cleated footwear as soon as the product is “field tested” to their “performance standards.” Management said that, based on the early testing, this could happen as early as 2008.

>>> Buzz in the aisles (and Street) has UA looking at basketball for their first non-cleated offering. SEW wonders if they couldn’t make more hay in the cross training category…