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Under Armour Beats Estimates

Zacks Equity Research

Under Armour, Inc. (NYSE:UA - News), one of the leading developers, marketers and distributors of branded sports apparel, footwear and accessories, recently posted better-than-expected fourth-quarter 2011 results. The company outdid the expectations on the back of healthy apparel, footwear, accessories and direct-to-consumer businesses.

The quarterly earnings of 62 cents a share moved ahead of the Zacks Consensus Estimate by a couple of cents, and soared 40.9% from 44 cents earned in the prior-year quarter. Under Armour’s net revenue for the quarter came in at $403.1 million, up 33.9% from the year-ago quarter, and was just ahead of the Zacks Consensus Estimate of $402 million.

Let’s Dig Deep

The double-digit jump in top line was driven by a 27.3% increase in apparel net revenue to $323.4 million, reflecting growth across men’s, women’s and youth apparel businesses, and strength witnessed at Charged Cotton apparel and Fleece.

Footwear net revenue soared 42.8% to $31.3 million, attributable to new running footwear introduced in 2011. Under Armour remains optimistic about strong market for footwear products. 

Accessories net revenue rose to $36.8 million from $14.8 million in the year-ago quarter. This rise was on account of switching the licensed hats and bags business to in-house, beginning January 2011. Licensing revenue increased 10.7% to $11.6 million.

Baltimore, Marylandbased company, Under Armour, said that direct-to-consumer net revenue soared 50% during the quarter, and now represents 38% of total revenue. Under Armour opened four new Factory House stores during the quarter under review, increasing the store count to 80.

Despite a 34.1% jump in cost of goods sold, gross profit rose 33.6% to $207.9 million. However, gross profit margin contracted 10 basis points to 51.6%, reflecting lower margins from North American wholesale apparel product business and switching of licensed hats and bags business to in-house. Operating income surged 57.2% to $55.3 million, whereas operating margin expanded 200 basis points to 13.7%.

Other Details

Under Armour ended the quarter with cash and cash equivalents of $175.4 million, total long-term debt of $77.7 million and shareholders’ equity of $636.4 million. The increase of $61.7 million in the long-term debt from the prior-year quarter reflects the acquisition of corporate headquarters in July. The company had no borrowings under its revolving credit facility of $300 million at the end of the quarter.

Capital expenditures were approximately $8 million for the quarter under review. Management now anticipates fiscal 2012 capital expenditures between $60 million and $65 million.

Inventory for the quarter climbed 51% year-over-year to $324 million. Management hinted that the unseasonably warm weather led to a rise in inventory level. Going into 2012, the company will have to keep a close watch on its inventory position. The company is focusing on Stock Keeping Unit (:SKU) rationalization program, which will help in eliminating SKUs based on lower sales volume or weak margins. Under Armour plans to lower its total assortment by 20% in fiscal 2012.

Strolling Through Guidance

Heading into 2012, management is taking a much more conservative approach on the inventory position, which remains an overhang. Consequently, Under Armour now expects revenue growth to be at the lower end of the long-term guidance range of 20% to 25%. Earlier, management had forecasted revenue growth to be at the higher end of the guidance range. However, management continues to forecast operating income growth at the higher end of the long-term guidance range of 20% to 25%.

Currently, Under Armour, which competes with Nike Inc. (NYSE:NKE - News) and Columbia Sportswear Company (NasdaqGS:COLM - News), holds a Zacks #3 Rank that translates into a short-term ‘Buy’ rating.

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