Under Armour (NYSE:UA), a developer and distributor of athletic apparel, footwear and accessories, will report its Q2 2013 results on July 25. The company has seen more than 20% y-o-y top line growth during the last 12 quarters. We expect the company to continue its growth momentum in the second quarter, helped by high growth across all the product categories, including apparel, footwear and accessories.
While Under Armour’s profitability had come under pressure in Q1 2013, on account of rise in SG&A expenses, we expect the company to see higher profitability in Q2 2013. We believe Under Armour is poised for strong growth in the future as it is still scratching the surface of its various growth drivers, including the women’s, international, direct-to-consumer, and footwear businesses.
Recap Of Q1 2013 Results
Under Armour’s net revenue rose by 23% annually in Q1 2013 to about $472 million, helped by strong sales of Fleece and Alter Ego product lines, and the introduction of new running and Baselayer products.
Apparel sales, which comprise for around 75% of Under Armour’s net revenues, rose by 22% y-o-y in Q1 2013, representing the 14th consecutive quarter of over 20% growth in this category. Footwear and accessories sales rose by 27% and 22% annually, respectively.
Under Armour’s gross margin expanded by 30 basis points annually during the quarter to 45.9%, owing to lower input costs, which was partially offset by less favorable sales mix and increased airfreight costs. Its operating margin came down from 6.3% in Q1 2012 to 2.9% in Q1 2013, on account of planned increases in marketing expenditure as well as higher incentive compensation costs, which led to a rise in SG&A expenses as a percentage of net revenues from 39.2% in Q1 2012 to 43.1% in Q1 2013.
Profitability Is Expected To Improve In The Second Quarter
Under Armour estimates its gross margin to expand by around 100 basis points in the second quarter on account of a y-o-y decline in input costs. While around $5 million of marketing expenditure was delayed from the first quarter to the second quarter, the company still forecasts a modest improvement in SG&A expenses during the quarter.  Owing to these forecasts, we expect Under Armour’s operating margin to expand on an annual basis during the second quarter.
Key Future Growth Drivers
Growth in international sales and direct-to-consumer business
International expansion is a key growth strategy for Under Armour. It aims to expand in the key markets of Asia (China, Korea and Japan), Europe (U.K., France and Germany), Australia and Latin America (Brazil, Mexico, Argentina and Chile) to enhance its international business. Various international subsidiaries will be opened in the near future in countries like Australia, Mexico, Brazil and Chile. We expect the share of international sales in overall sales to reach 12% by 2016 from 6% in 2013. We believe Under Armour is still scratching the surface internationally, and over the long run, the company could derive a substantially higher percentage of its overall revenues from the international business.
Expanding the direct-to-consumer business is another important strategy for Under Armour as it helps provide higher gross margin and better control over the business. The company will add 10 new factory house stores in 2013. In addition, the company also plans to increase the size (average square feet/door) of its existing doors from 5,800 in 2013 to 7,700 in 2016. On a total square feet basis, Under Armour will expand from 660,000 square feet in 2013 to over 1 million square feet in 2016.  We believe the strategy to expand doors is especially encouraging since it reflects expansion in product portfolio over the future, and confidence in the high demand for the company’s products.
Expansion in women’s business and growth in footwear sales
Historically being more popular for its men’s products, Under Armour is now increasingly focusing on women’s products to grow its business. The company is altering the retail experience at its stores and increasing the portfolio of women’s products to attract more female customers. The company has added creative talent in the recent past to boost its innovative offerings in this segment. We expect new products within the ArmourBra and Studio lines to boost sales of women’s products in 2013. Over the long run, Under Armour expects the proportion of women’s products in total apparel sales to rise from 27% in 2010 to 33% in 2016. 
Growing the footwear segment represents another goal for Under Armour as it will help the company enhance its appeal as a full head-to-toe brand, and will position the company stronger against international sporting giants like Nike and Adidas. The company is taking several steps to boost its footwear market share, such as launching new footwear technologies, hiring new talent, and increasing the distribution of its footwear products. Owing to these efforts, we expect footwear sales growth to outpace overall sales growth at Under Armour in the future.
We will update our price estimate for UA’s stock after the earnings release.Notes:
- Under Armour Management Discusses Q1 2013 Results – Earnings Call Transcript, Seeking Alpha, April 19, 2013 [↩]
- Under Armour 2013 Investor Day, June 5, 2013 [↩]
- Under Armour’s CEO Hosts Investor Day Meeting (Transcript), Seeking Alpha, June 5, 2013 [↩]