Under Armour Results Flex Growth Muscles Though Profitability Looks Wimpy

by Trefis Team
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Under Armour
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    Quick Take 

  • Under Armour posted 23% annual growth in its top-line during Q1 2013, with strong growth across all product categories.
  • Its operating margin dropped to 2.9% in Q1 2013 from 6.3% in Q1 2012 on account of planned increase in marketing and other SG&A expenses.
  • The company forecasts net revenue in 2013 to grow by around 21-22%, with modest expansion in its operating margin.
  • We believe the company will continue to post rapid sales growth in the future on account of its strategic initiatives.

Under Armour (NYSE:UA), a developer and distributor of athletic apparel, footwear and accessories, posted net revenue of around $472 million in Q1 2013, representing an y-o-y increase of 23%. The strong growth in its top-line was underscored by higher sales of Fleece, new running products and introduction of a new Baselayer product. Its gross margin increased by 30 basis points annually to 45.9% in Q1 2013 driven by lower input costs, which was partially offset by less favorable sales mix and higher airfreight charges.

Under Armour stepped up its marketing efforts during the quarter, with initiatives such as the ”I Will” marketing campaign. While these efforts helped in driving sales, they also contributed to an increase in selling, general and administrative (SG&A) expenses. SG&A expenses as a percentage of net revenues rose to 43.1% in Q1 2013, as compared to 39.2% in Q1 2012. This resulted in lowering of operating margin from 6.3% in Q1 2012 to 2.9% in Q1 2013.

We are encouraged by the overall results. While Under Armour’s profitability decreased during the quarter, it mainly reflected a planned expenditure on marketing and other activities. The company forecasts the overall SG&A spending for 2013 to remain in line with the prior year with a modest expansion in annual operating margin. We expect the company to continue its growth momentum in the future on account of its strategic initiatives of expanding its women’s, footwear and international business.

See our full analysis for Under Armour

Rapid Growth Across All Product Categories

Under Amour showed solid growth across all product categories during the quarter. Its apparel revenues grew by 22% annually during Q1 2013, representing the 14th consecutive quarter of more than 20% growth in this product category. Strong demand across women’s and youth business, combined with higher sales of Fleece and Alter Ego product lines contributed to this performance.

Footwear revenues grew by 27% annually during the quarter on account of new running products featuring Under Armour’s Spine technology. Accessories revenues grew by 22% on account of higher sales in head wear and headbands categories.

Key Future Growth Drivers

Under Armour continued to make headway into its growth strategies of expanding its women’s, footwear, international and direct-to-consumer business during the first quarter.

Within the women’s business, Under Armour added new product offerings within the ArmourBra and Studio lines and is working towards enhancing its design talent to bring more innovative products to the market. In the footwear business, it is focusing on categories such as running as well as baseball and football cleats to increase its footwear market share. Moreover, the company is increasing the distribution of women and footwear products across its retail and wholesale stores. On account of these efforts, we expect Under Armour’s revenues from these businesses to grow rapidly in the future.

Under Amour’s direct-to-consumer and international net revenues rose by 31% and 41% annually in Q1 2013 respectively, outpacing the overall sales growth of the company. In 2013, it aims to enhance its direct-to-consumer business by adding 10 new factory house stores. Moreover, the company aims to grow its international business by increasing its operations within the geographies of Europe, Asia and Latin America. We think the sales growth in these segments will continue to surpass the overall company’s sales growth throughout 2013.

Updated Guidance For The Year 2013 ((Under Armour Management Discusses Q1 2013 Results – Earnings Call Transcript, Seeking Alpha, April 19, 2013))

Net revenue in the range of $2.21 -2.23 billion, representing an annual growth rate of 21 % to 22%

- Operating income in the range of $256 – 258 million, representing growth of 23-24%

- Effective tax rate of 39-39.5%

- Modest expansion in overall gross margin from the 47.9% level recorded in 2012

We are in the process of estimating the new price for Under Armour’s stock.

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