Under Armour Earnings Preview: Weak Holiday Season Can Impact Sales

Under Armour (NYSE:UA), a manufacturer and distributor of performance apparel, footwear and accessories, will announce its Q4 2012 results on January 31, 2013. Under Armour has witnessed more than 20% y-o-y top-line growth during the last 10 quarters. ^[1]

While Under Armour’s expansion in international markets is an encouraging trend, North America remains the most important market for the company. Since other retail companies such as Coach (NYSE:COH) and Lululemon Athletica (NASDAQ:LULU) have reported weak consumer demand during the holiday season, we feel that this factor may also impact Under Armour’s earnings in Q4.

In the long term, we believe that Under Armour is well-positioned to grow its revenues as it continues to witness high demand for its apparel products. Additionally, we feel that a focus on innovation and strong marketing strategy, especially within footwear and women’s products, will help drive sales in the future.

See our full analysis for Under Armour

Results Could Be Impacted By A Weak Holiday Season

Sales in the North American region account for around 94% of the company’s sales. In Q3 2012, the company posted 25.2% y-o-y growth in North American sales. Taking into consideration that retail companies such as Coach and Lululemon Athletica reported weak consumer demand during the holiday season on account of fiscal cliff concerns, we think that Under Armour’s North American business might report slower growth in Q4.

Coach reported a mere 1% y-o-y increase in North American sales in Q2 2013 compared to a 7.6% y-o-y increase in the previous quarter. ((Coach’s CEO Discusses F2Q13 Results – Earnings Call Transcript, Seeking Alpha, January 23, 2013))

Under Armour is also focused on expanding its international business, which currently represents a mere 6% of its sales. It has forged partnerships with popular sporting leagues such as Tottenham Hotspur (an English football club) to enhance its brand appeal among sports fans internationally. It also opened its first stores in China in 2011 to leverage strong market opportunity present in the country.

We believe that Under Armour is still in the early stages of growth in its international business and that there is a significant potential for growth in these markets.

Potential Growth In Apparel And Footwear Division Can Fuel Revenues

Apparel sales account for around 74% of Under Armour’s total sales. The company has posted sales of more than 20% y-o-y in this product segment over the last 12 quarters. ^[2]

With its HeatGear, ColdGear and AllSeasonGear product lines, it is positioned as the market leader in the performance apparel market. While competition is increasing in this product segment from the likes of Nike, we believe that Under Armour will continue to show high growth within this segment on account of its innovative products.

Footwear sales, which account for around 15% of total sales, also represent a strong growth opportunity for the company.  Under Armour recorded around 29% y-o-y growth in footwear sales in the first nine months of 2012.

Footwear contributes close to 15% to Under Armour’s value as per our estimate. Under Armour faces stiff competition within this segment from bigger players like Nike and Adidas. We feel that Under Armour has the potential to also gain market share in the footwear market as it continues to differentiate itself by launching new products.

Our price estimate for Under Armour stands at $53, implying a premium of about 11.6% to the market price.

1. Under Armour Management Discusses Q3 2012 Results – Earnings Call Transcript, SeekingAlpha, October 25, 2012 [↩]
2. Under Armour Management Discusses Q3 2012 Results – Earnings Call Transcript, SeekingAlpha, October 25, 2012 [↩]