Earnings Review: Strong Core Performance Helps Under Armour Maintain Its Impressive Growth Momentum

Under Armour (NYSE:UA), a developer and distributor of athletic apparel, footwear and accessories, 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 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 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]

Strong Growth Across All Product Categories

Apparel sales, which comprise about 75% of Under Armour’s net revenues, rose by 26% to $705 million, primarily driven by strength in the company’s Charged Cotton and Storm, and ColdGear Infrared products. This represented the 20th consecutive quarter of more than 20% growth in this product category. In the women’s business, the company’s running and Studio lines remained strong, while its youth business was driven by the training and sport-specific 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 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. Accessories revenues rose by a strong 32% to $85 million, due to high sales of head wear offerings and gloves. Direct-to-Consumer net revenues, which represented 26% of total net revenues for the quarter, grew 35% 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 increased square footage in its factory house stores by 18% in Q3, following a 22% increase in the previous quarter. At the end of the third quarter, the company’s total factory store count stood at 122, up 9% from the third quarter of fiscal 2013. 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. In the third quarter, international revenues represented 9% of the net revenues. Hence, we think the revenue growth at both these segments will surpass the overall revenue growth of the company in the long run. ^[2]

We will update 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 Kevin Plank on Q3 2014 Results [↩] [↩] [↩] [↩]