Earnings Review: Under Armour Posts Its Biggest Quarter Yet

Under Armour (NYSE:UA), a developer and distributor of athletic apparel, footwear, and accessories, posted another very strong quarter in Q3 2015, with 28% net revenue growth. The company maintained an excellent growth rate as it reached a 22nd consecutive quarter of an over 20% increase in its top line. This was the company’s first ever quarter with over $1 billion in revenue, reporting $1.2 billion in revenue. ^[1] However, net income as a percentage of revenues declined from 9.5% last year to 8.3% as both gross and operating margins declined. Below, we take a look at the company’s results in greater detail. ^[2]

Strong Growth Across All Product Categories

Apparel sales, which comprise about three-fourths of Under Armour’s net revenues, rose by 23% to $866 million compared to $705 million last year, primarily driven by strength in the company’s Base Layer, Storm and ColdGear Infrared product lines. ^[3] This represented the 24th consecutive quarter of more than 20% growth in this product category. Six consecutive years of more than 20% growth in this category indicate that there is enormous demand for these products and the company has a strong enough brand image to capture that opportunity.

Footwear sales grew by 61% to $196 million, owing to strength in the running and basketball categories, and growth in the golf and hiking categories. ^[3] The company’s key products in this segment include shoes made on the SpeedForm platform, such as the SpeedForm Fortis running shoe. This platform is a key driver of the company’s growth in this segment because it takes a novel approach to manufacturing sports footwear. According to company management, the number of people involved in the manufacture of a single shoe is upwards of 150, but Under Armour has been able to reduce the number of human touches in the manufacturing of its shoes on its SpeedForm Platform by up to 30%. ^[3] Moreover, the company feels that there is more scope for reduction left and if the company can do that it can reduce the time to market for its products, lower cost of manufacturing and achieve higher sell through rates. Additionally, the company is launching a Curry2 shoe following the success of the CurryOne, a signature shoe line named after NBA superstar Stephen Curry. It also hired “six or seven” new people for its women’s footwear team. ^[3] All these investments should help drive the company’s sales going forward.

Accessories revenues rose by a solid 22% to $104 million, due to high sales of Under Armour’s line of bags. ^[4] Direct-to-Consumer net revenues, which represented 26% of total net revenues for the quarter, grew 28% year over year. ^[4] The company also launched six new websites over the quarter, bringing its overall website count to 24 websites. ^[5]

International Growth Gathering Pace

Under Armour is slowly becoming an internationally recognized brand and its international business is starting to gather momentum. In the third quarter, international revenues grew to 10% of total revenues, growing 52% on a year-over-year basis to $130 million. ^[4] Excluding the impact of currency fluctuations, international revenue grew by 68% compared to the same quarter in the previous year. ^[4] The company is targeting specific regions in order to grow its international business. In Europe, its focus is on the U.K. and Germany, where its e-commerce strategy played a key role in growing brand awareness, as the company launched nine local websites. In Asia, the company is trying to grow with the help of its Direct-to-Consumer channel as well as by finding partner stores. The company’s “brand house” store opening in Shanghai late last year is playing a key role on this front.

Expanded Product Categories

In the Earnings Call, Under Armour CEO Kevin Plank again emphasized that a key point of the company’s strategy going forward will be a more focused targeting of customers. The company is trying hard to segment customers into smaller and smaller categories, and trying to make products that appeal to a large number of small segments as opposed to a one-size-fits-all strategy. The company is leveraging its acquisitions in the Connected Fitness space in this regard. Under Armour is host to the largest fitness community in the world with over 140 million users worldwide, who have logged in over 1 billion workout sessions and 5 billion meals. ^[3] The Connected Fitness approach basically means that the company isn’t just interested in getting customers to buy its products but wants to become an integral part of their lives. Through apps that are available on connected devices, the company has been gathering data on activities like sleep and nutrition. Combining this data with strong algorithmic capabilities will help the company design better products for these customers.

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1. Under Armour 8K, Investor Relations [↩]
2. Under Armour’s (UA) CEO Kevin Plank on Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, October 2015 [↩]
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5. Ref: 2 [↩]