Under Armour (NYSE:UA), a manufacturer and distributor of performance apparel, footwear and accessories, will report its Q1 2013 results on April 19. Under Armour has witnessed more than 20% y-o-y top line growth during the last 11 quarters. We expect the company to continue its growth momentum in Q1 2013, aided by strong growth in all the key product categories, including apparel, footwear and accessories.
While strong growth is expected in Under Armour’s top line, its profitability could come under pressure this quarter due to rise in marketing expenses, higher incentive compensation charges and costs related to opening of new stores. In the long run, we expect Under Armour’s growth to be fueled by expansion in footwear, women’s and international business. In addition, growth in Under Armour’s direct-to-consumer business is expected to augur well for its gross margins in the long run.
Recap of Q4 2012 Earnings
In Q4 2012, Under Armour’s net revenues grew by 25% annually, to reach $506 million. Apparel sales, which account for around 75% of Under Armour’s net revenues, rose by 25%, representing the 13th consecutive quarter of more than 20% growth in this category. Footwear and accessories revenues rose by 43% and 16% respectively.
Profitability Will Be Closely Tracked In Q1 2013
In Q4 2012, Under Armour’s gross margin fell to 50.3% as compared to 51.6% in Q4 2011, owing to factors such as an unfavorable change in sales mix and higher air freight charges. We expect gross margin in Q1 2013 to be in line with the prior year, as lower input costs could be offset by higher airfreight charges and a less favorable sales mix.
We expect selling, general and administrative expenses to be higher in Q1 2013, as compared to the prior year on account of higher marketing expenses, increased incentive compensation charges and other costs related to opening of new stores.
Key Future Growth Drivers
Expansion in women’s business and growth in footwear sales
The expansion in women’s business represents one of the key growth drivers for Under Armour. The company is actively taking efforts to bolster its brand image among female customers by changing the retail experience at its stores to suit them. Its recent deal with USA Gymnastics to be their official gear provider is also expected to boost its brand image among women customers. Under Armour is growing the floor space at its stores with a greater assortment of women’s products, and we expect its revenues from women’s business to grow rapidly in the future.
Growing its footwear revenues is another key goal for Under Armour. The company intends to enhance its market share in various footwear categories such as running and basketball by launching new footwear technologies, hiring new talent, increasing footwear distribution and increasing its marketing efforts. We believe this segment could continue to post high growth in 2013.
Growth in International markets
We believe Under Armour is still scratching the surface internationally as it derives only around 6% of its net revenues from the international markets. Since Under Armour has been able to successfully compete against larger rivals such as Nike and Adidas in North America, we believe it can replicate its success in other international markets. International revenues grew by 30% in Q4 2012, and we expect growth in international sales to outpace overall revenue growth in 2013.
Our $50 price estimate for Under Armour, represents around 10% downside to the market price. Our valuation is lower as we think the market price already reflects all the growth drivers present in Under Armour’s stock.