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Under Armour Beats Zacks Estimates

Zacks Equity Research

Under Armour, Inc. (UA), one of the leading developers, marketers and distributors of branded sports apparel, footwear and accessories, recently posted better-than-expected first-quarter 2012 results. The company outdid expectations on the back of new and innovative products introduced to enhance market share.

The quarterly earnings of 28 cents a share beat the Zacks Consensus Estimate of 24 cents, and jumped from 23 cents earned in the prior-year quarter. Under Armour’s net revenue came in at $384.4 million, up 22.9% from the year-ago quarter, and came ahead of the Zacks Consensus Estimate of $379 million.

Let’s Dig Deep

The double-digit jump in the top-line was driven by a 22.9% increase in apparel net revenue to $283.3 million, reflecting growth across men’s, women’s and youth apparel businesses, and innovative products such as ColdBlack and Armour Bra.

Footwear net revenue soared 23.8% to $63.7 million, attributable to new running footwear introduced in 2012. Under Armour remains optimistic about a healthy market for footwear products. 

Accessories net revenue rose to $29.6 million from $23.5 million in the year-ago quarter. The company has now completely passed the transition phase from the licensed hats and bags business to in-house. Licensing revenue increased 7.2% to $7.8 million.

Baltimore, Maryland-based Under Armour said that direct-to-consumer net revenue surged 49% during the quarter, and now represents 25% of total revenue. Under Armour opened four new Factory House stores during the quarter under review, increasing the store count to 84.

Despite a 24.8% jump in cost of goods sold, gross profit rose 20.8% to $175.2 million. However, gross profit margin contracted 80 basis points to 45.6%, reflecting lower margins from North American apparel and accessories product business. Operating income grew 15.4% to $24.4 million, whereas operating margin shriveled 50 basis points to 6.3%.

Other Details

Under Armour ended the quarter with cash and cash equivalents of $107.1 million, total long-term debt of $75.8 million and shareholders’ equity of $674.1 million. The increase of $62.1 million in the long-term debt from the prior-year quarter reflects the acquisition of corporate headquarters in July 2011. The company had no borrowings under its revolving credit facility of $300 million at the end of the quarter.

Capital expenditures were approximately $8.8 million for the quarter under review. Management now anticipates fiscal 2012 capital expenditures between $60 million and $65 million.

Inventory for the quarter climbed 30.5% year-over-year to $324.4 million. 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

Under Armour now expects fiscal 2012 revenue between $1.78 billion and $1.80 billion, reflecting year-over-year growth of 21% to 22%. Earlier, management had forecasted revenue growth to be at the lower end of the long-term guidance range of 20% to 25%.

The company projected operating income in the range of $203 million to $205 million for fiscal 2012, indicating growth of 25% to 26% from the prior year. Earlier, management had guided operating income growth at the higher end of the long-term guidance range of 20% to 25%.

Closing Commentary

Under Armour maintains strict control over its brand image, with an in-house marketing and promotions department, engaged in designing and advertising while cautiously controlling the distribution of its products.

The company offers substantial growth opportunities in the long term through geographic, product/category and direct-to-consumer expansion. Based on Under Armour’s well established brand name, we expect the company to continue to benefit from longer-term shifting trends toward performance-based products within the industry.

Currently, Under Armour, which competes with Nike Inc. (NKE) and Columbia Sportswear Company (COLM), holds a Zacks #1 Rank that translates into a short-term Strong Buy rating.

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