Under Armour earnings top expectations

Posted: 10:21 am Tue, July 27, 2010
By Liz Farmer
Daily Record Business Writer

Under Armour Inc. reported Tuesday it more than doubled its second-quarter income thanks to boons in apparel and direct-to-consumer sales and raised its 2010 revenue forecast, but executives continued to stay quiet on plans to launch a basketball shoe next year.

The Baltimore sports apparel company beat analysts’ expectations for the sixth quarter in a row.

Net income in the second quarter, which ended June 30, rose 150 percent to $3.5 million, or 7 cents per share, from $1.4 million, or 3 cents per share, a year earlier.

Analysts had predicted a profit of 4 cents per share.

Net revenue increased 24 percent to $204.8 million during the second quarter, compared with $164.6 million a year earlier.

“Historically without question the second quarter has always been their weakest — but to go from $164 to $205 is pretty good growth sequentially,” said Andrew Beckoff, an analyst for Meyers Associates in New York. “I think you have to like that.”

Under Armour said the increases were largely driven by a 34 percent growth in apparel revenue and a 60 percent growth in direct-to-consumer sales.

The company also raised its year-end outlook to between $990 million and $1.01 billion from a forecast of between $965 million and $985 million. CEO Kevin Plank said this year he hoped for Under Armour to achieve its first billion-dollar year in 2010.

But Plank was vague when analysts questioned him during a conference call about the company’s planned basketball shoe launch. Under Armour said in 2009 it would launch a basketball shoe this year, then in 2010 it pushed back the launch to 2011, saying it wanted to focus more on developing the product first.

Plank said trends have shown it can take 18 months before footwear begins to show its impact in the market. Last May, Under Armour launched its cross-training shoe in an attempt to steal market share from the long-dominant Nike.

“We’re not waiting by any stretch, but we have again recalibrated our footwear,” Plank said. “In 2011 and 2012, you’re going to begin to see what happens when Under Armour becomes dominant in footwear. It’s like when we launched our women’s brand, and people said [in 2005] how are you going to become a women’s brand?”

Footwear sales were again weak in the second quarter, declining 4.5 percent to $35.8 million. But executives noted this year’s sales were against last year when the footwear was launched and said they had expected the drop. Wayne Marino, chief operating officer, said Under Armour also expects a decrease in footwear sales during the next quarter.

He also warned that inventory and costs would increase as the company nears its goals of opening 19 more factory stores this year. Marino said as inventory levels increase, that rate of growth will likely outpace sales growth by the end of the year.

“Our basis of factory stores initially was to liquidate excess inventory. Then we learned that there was a consumer out there we could reach,” he said. “As we expand our factory base, we’re not going to have enough inventory to meet that demand so we’ll start to move to a factory model [apparel].”

But Beckoff noted the third and fourth quarters are typically retailers’ bread-and-butter seasons with back-to-school and holiday sales.

“That’s when they do the majority of their business,” he said. “That would be a warning signal if their inventory growth outpaces sales [growth].”

Under Armour also announced this year it is bringing its accessories business — hats and bags — in-house next year, which will also drive up costs. Plank told analysts the company expects gradual revenue from the new production to reach $60 million in 2011.

Shares of Under Armour initially climbed to $39.85 per share by mid-morning Tuesday — the highest level since $43 per share in October 2008. But the stock finished at a slight loss and closed at $37.93, a decline of 0.8 percent.

Beckoff predicts the stock can again reach its 2007 levels of $50 per share within the next 18 months.