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Under Armour Falters Despite Robust Earnings

Zacks Equity Research

The market sentiment for Under Armour Inc. (UA) remained bearish as shares of this sports apparel retailer dropped substantially despite the company’s outstanding first quarter fiscal 2014 performance. The stock price of this Zacks Rank #3 (Hold) stock rolled down 7.38% during yesterday’s trade, closing out at $50.42.

What Went Against Under Armour?

Though the company delivered spectacular top and bottom line results, investors were largely disappointed with the company’s conservative forecast for fiscal 2014 that reflected a relatively lesser growth expectation for the rest of the year when compared to the overwhelming growth seen in the first quarter.

The company posted quarterly earnings on a post-split basis, of 6 cents a share surpassing the prior-year earnings and the Zacks Consensus Estimate of 4 cents per share. The growth in earnings during the quarter was primarily driven by supply chain improvements and a favorable sales mix that helped margins growth while costs remained subtle.

Aided by strong performance of the Apparel, Footwear and Accessories categories, total revenue came in at $641.6 million, up 36% year over year and ahead of the Zacks Consensus Estimate of $597 million.

Moreover, the company witnessed substantial growth in operating income during the quarter, which reflected 99% growth to $27 million compared with $13 million in the prior-year quarter. Operating margin expanded 130 basis points to 4.2% compared to 2.9% in the prior-year period.

Encouraged by the strong first-quarter results, the company raised its 2014 revenue forecasts to a range of $2.88 billion - $2.91 billion, reflecting growth of 24% to 25% over last year. Earlier, the company had projected 2014 net revenue in the band of $2.84 billion to $2.87 billion, up 22% to 23% from the prior year.

The company also raised its operating income forecast for the year to come in the range of $331 million to $334 million, up 25% to 26% from 2013 levels, while it had previously guided operating income between $326 million and $329 million, representing 23% to 24% year-over-year growth.

Citing the exceptional revenue and operating income growth recorded in the first quarter, we believe the market’s reaction to the nominal rise in the forecasts for the year was as expected.

However, from a different perspective, we appreciate management’s prudence in keeping the raise low as year-over-year comparisons for the rest of the year are expected to be tougher. This is further justified by the company’s reiteration of the targeted revenue growth rate for the rest of 2014 to be nearly in line with its long-term Investor Day compounded annual growth target of 22%.

Category Performance

Under Armour’s largest product category, Apparel, once again witnessed strong sales. Apparel sales jumped 32.9% to $459.2 million, reflecting growth in categories such as golf, hunting, training, studio, and basketball.

Footwear net revenue soared 41.2% to $114.0 million during the quarter due to the newly introduced products in running like SpeedForm Apollo. Net revenue in the Accessories category rose 42.9% to $51.6 million during the quarter led by headwear, while Licensing and other revenue elevated 81.8% year over year to $16.8 million.

Under Armour announced a 33% increase in direct-to-consumer net revenue during the quarter, representing 26% of the total revenue. Meanwhile, International net revenues grew 79% to $55 million in the quarter, making for about 9% of total net revenues.

Margin and Costs

Gross profit rose 38.8% to $300.7 million, while gross profit margin expanded 100 basis points to 46.9% attributable to supply chain enhancements and a favorable sales mix in the Factory House outlet business.

Selling, general and administrative expenses for the quarter grew 34.8% to $273.8 million, while as a percentage of net revenues it contracted 40 basis points to 42.7%. SG&A expense leverage during the quarter resulted from an increase in marketing and selling costs as a percentage of net revenue, offset by a decline in product innovation and supply chain costs and corporate services, both as a percentage of net revenue.

Stores Update

Under Armour opened 1 new Factory House store during the quarter, taking the store count to 118. Additionally, the company expanded 2 of its existing stores during the quarter.

Store openings and expansions during the quarter formed a part of the company’s plan to open 7 new Factory House stores and expand 12 existing locations in 2014.

Other Financial Details

Under Armour ended the quarter with cash and cash equivalents of $179.9 million, down 30% from the prior year, while long-term debt dropped to $46.8 million from $51.7 million in the prior-year period. Shareholders' equity as of Mar 31, 2014 was $1,108.6 million.

Capital expenditures came in at approximately $31 million for the reported quarter. Management continues to expect 2014 capital expenditures between $140 million and $150 million.

Other Stocks to Consider

Other stocks worth considering in the Apparel, Footwear & Accessories industry include Foot Locker Inc. (FL), American Apparel Inc. (APP) and Hanesbrands Inc. (HBI), all of which hold a Zacks Rank #2 (Buy).

Read the Full Research Report on UA
Read the Full Research Report on FL
Read the Full Research Report on HBI
Read the Full Research Report on APP

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