Earnings Preview: Under Armour’s Growth Drivers Have A Lot Of Steam Left In Them Yet

Under Armour (NYSE:UA), a developer and distributor of athletic apparel, footwear, and accessories, is scheduled to report its Q4 2014 results on February 4. It has recorded over 20% top line growth during the last 18 quarters. We believe the company will be able to continue its growth momentum in the fourth quarter, as it is still scratching the surface of its various growth drivers, including the women’s, international, direct-to-consumer, and footwear businesses. Our profitability outlook for the third quarter is also positive as we think the operating margin could rise on an annual basis due to lower input costs in Q4, resulting from low oil prices, a downward trend in cotton prices, and a strong inventory position.

See our full analysis for Under Armour

Recap of Q3 2014 Results

Under Armour posted another very strong quarter in Q3 2014 with a 30% net revenue growth to $938 million. The company maintained its solid growth momentum as it reached an 18th consecutive quarter of an over 20% increase and a 4th consecutive quarter of over a 30% increase in its top line. We believe the company will continue to show strong growth in the future as consumers continue to respond to the strength of its brand and as the company’s efforts to lure in women customers are successful. ^[1]

Gross margins improved by 120 basis points to 49.6% in Q3 2014. The expansion in margin was driven by the favorable comparison to last year’s margin, which was suppressed due to high import cost duties, and a favorable year-over-year sales mix. Selling, general, and administrative expenses as a percentage of net revenues, increased by 230 basis points to 34% in the third quarter of 2014, as the company’s expenses related to marketing, supply chain enhancements, and selling costs, rose over the quarter. Following these results, the company has raised its revenue guidance for 2014 to net revenues of $3.03 billion, representing growth of 30%. ^[2]

Various Growth Drivers Could Help the Company Maintain its Growth Momentum

We believe Under Armour is poised for continued strong growth in the future, owing to its key growth strategies of expanding the women’s, footwear, international, and direct-to-consumer businesses.

The company aims to grow the women’s business to around $1 billion by 2016, and is taking several measures to accomplish this goal. It has expanded its creative talent within the women’s business and altered its product portfolio and retail presentation to suit the tastes of female customers. During the third quarter, the company also signed an endorsement deal with supermodel Gisele Bundchen that should help boost the sales of its women’s products.

Within the footwear segment, UA plans to increase its market share with Highlight baseball and football cleats, as well as its innovative technologies in the running segment, like SpeedForm and the Spine running platform. In the previous quarter, footwear sales grew by 50% to $122 million, owing to strong growth in the running category. The much publicized SpeedForm Apollo running shoe showed excellent sell-through rates, while the company also started offering a broader running assortment over the quarter, including the Assert, Engage, and Spine Evo styles. Footwear has now grown to represent 13% of the company’s net revenues. ^[2]

The distribution of both women’s and footwear products is being increased across its doors, and hence we believe these steps will continue to drive growth at Under Armour. During Q3, Under Armour’s direct-to-consumer revenues rose by 26%, outpacing the overall revenue growth at the company. The company opened new factory house stores in FY 14 and also expanded many of its existing stores during the year. Moreover, the company plans to expand its operations in the markets of Asia, Europe, Australia, and Latin America. The share of international sales within overall sales is forecast to rise from 6% in 2013 to 12% by 2016. Hence, we think the revenue growth at both these segments will surpass the overall revenue growth of the company in the long run.

We will update our $74 price estimate for Under Armour after the earnings release.

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