Under Armour Earnings Review: Strong Growth In Apparel Drives Profitability

Under Armour (NYSE:UA), a developer and distributor of athletic apparel, footwear and accessories, posted another very strong quarter in Q1 2014 with a 36% net revenue growth to $643 million. The company maintained its solid growth momentum as it reached a 16th consecutive quarter of an over 20% 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 100 basis points to 46.9% in Q1 2014. The expansion in margin was driven by a higher percentage of sales of excess inventory through factory outlets, a reduction of air freight expenses and lower product input costs, especially in the accessories business. Selling, general and administrative expenses as a percentage of net revenues declined by 40 basis points to 42.7% in the first quarter of 2014, as the company managed to reduce product innovation and supply chain related costs enough to overcome increases in marketing and selling costs. Following these results, the company has raised its revenue guidance for 2014 to net revenues of $2.88 billion to $2.91 billion, representing growth of 24% to 25%. ^[2]

See our full analysis for Under Armour

Strong Growth Across All Product Categories

Apparel sales, which comprise about 75% of Under Armour’s net revenues, rose by 33% to $459 million, primarily driven by strength in the company’s Fleece, UA Tech and Baselayer brands. This represented the 18th consecutive quarter of more than 20% growth in this product category. In the women’s business, the company’s Studio line remained strong, while its youth business was driven by the training and baseball categories. We believe the solid results in UA’s biggest product category are highly encouraging. The strong growth indicates that opportunities still exist in the company’s established men’s apparel business and the company has a strong brand image that it can leverage to exploit those opportunities. ^[2]

Footwear sales grew by 41% to $114 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. Accessories revenues rose by a strong 43% to $52 million, due to high sales of headwear. Direct-to-Consumer net revenues, which represented 26% of total net revenues for the quarter, grew 33% year-over-year. ^[2]

Key Future Growth Drivers To Keep Under Armour’s Growth Story Intact

We believe Under Armour’s key growth strategies of expanding the women’s, footwear, international and direct-to-consumer business will continue to fuel strong growth at the company in the future.

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. 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. 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 2013, Under Armour’s direct-to-consumer revenues rose by 33%, outpacing the overall revenue growth at the company. The company opened seven new factory house stores in Q1 and will also expand 12 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 in 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.

Brand Expansion

The company’s efforts at building its brand image have previously been focused on growing its apparel, footwear and accessories product lines in an integrated way with the running, training and baseball categories. However, over the first quarter, the company introduced new golf and outdoor wear related product lines. The golf category represents the company’s first step outside compression apparel. Under Armour signed endorsement deals with a slew of young golfers like Hunter Mahan, Scott Stallings, Gary Woodland and Jordan Spieth over the past year and will leverage these deals to grow its sales in the segment. ^[3] Furthermore, the company has amplified its efforts to become a premium brand by introducing the UA Scent Control and MagZip lines for hunting and fishing enthusiasts. These product lines will help diversify the brand by allowing it to access a higher income demographic. In the future, we expect profitability in these categories to be driven by a sales mix of high margin and limited but exclusive product lines. ^[2]

We are in the process of revising our $74 price estimate for Under Armour after the earnings release.

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1. Under Armour 8-K [↩]
2. Under Armour’s CEO Discusess Q1 FY 2014 Results, Seeking Alpha, April 2014 [↩] [↩] [↩] [↩]
3. Jordan Spieth’s Scintillating Performance Shines A Light On Under Armour At The Masters, Forbes, April 2014 [↩]