UPDATE: Under Armour Stock Down More Than 6 Percent
During the Q3 call, CFO Brad Dickerson said he now expects Q4 gross margins to decline approximately 100 basis points due to recurring macro trends — namely the strong U.S. dollar — as well as heavier freight costs and more footwear liquidation sales as part of the “normal inventory management process.”
Although the CFO emphasized that much of the gross margin contraction would be due to the higher growth rates in the firm’s shoe business, investors may have missed that part — as the company’s stock continues to descend into the red zone.
Upbeat analysts, on the other hand, shrugged off investor concerns as a misunderstanding of the firm’s accelerated growth.
“The inventory build is a function of Under Armour preparing to deliver more product on time and having more product on hand,” Lyon explained. “They are trying to meet the delivery dates requested by their wholesale partners because that has been an issue for them — not being able to flex their supply chain to meet initial on time delivery date — so this is them building inventory so those dates can be met especially going into the holidays.”
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The footwear liquidation, Lyon explained, is not due to products not selling well. In fact, just the opposite is true.
“They now have more footwear units because the business is growing so fast,” Lyon said. “They expect the same rate of full-price selling versus clearance product — it’s just that the footwear business is 60 percent higher than it was last year so there are more units that are going to be cleared in their markdown which will weigh disproportionately on gross margins.”
What We Reported Earlier
Under Armour Inc. continues to be one of the year’s biggest footwear success stories. The firm scored another Wall Street beat in Q3, with revenues and profits showing double-digit percentage gains.
“Our scoreboard in the third quarter not only marked our 22nd straight quarter of at least 20 percent net revenue growth, but also our first $1 billion quarter,” said Kevin Plank, Under Armour’s chairman and CEO, in a release. “Our current Rule Yourself global marketing campaign highlights the training and dedication that drives our athletes to be their best on the biggest stages.”
“The campaign features Tom Brady, Misty Copeland, Stephen Curry and recently named PGA Tour Player of the Year Jordan Spieth,” Plank continued. “When combined with more than 150 million unique registered users across our Connected Fitness community, logging more than 6.5 billion food items and 1.5 billion workouts year-to-date, our brand is resonating with more athletes than ever before, and we are investing to not only build deeper relationships with these athletes today, but to fulfill our longer-term vision to change the way athletes live.”
Footwear gave the Baltimore-based company its biggest boost, growing 61 percent, to $196 million in sales in Q3, reflecting continued product expansion across the running, basketball and training categories, the firm said.
Growth was strong in other key categories as well, including direct-to-consumer, which represented 26 percent of total net revenues for the third quarter, and grew 28 percent year-over-year. Revenues in international markets also rose 52 percent year-over-year.
While the firm beat forecasts and upped its expectations for the remainder of the fiscal year, at press time, its share price had declined nearly 5 percent, to $94.54.
Net Income: Profits for the third quarter, ending Sept. 30, 2015, increased 13 percent, to $100 million, compared with $89 million in the prior year’s same period.
EPS: Diluted earnings per share were 45 cents, compared with 41 cents per share in the prior year’s same quarter.
Net Revenue: Net revenues increased 28 percent, to $1.20 billion, compared with net revenues of $938 million in the same year-ago quarter.
Hit, Miss or Beat: The firm beat Wall Street’s forecasts for revenues and EPS. Analysts polled by Yahoo Finance had predicted revenues of $1.18 billion and EPS of 44 cents.
Executive Insights: “We are focused on three key areas where we are confident the return on our investment will be increasingly evident as our business continues to grow globally. The first is our core business, including: sports marketing assets, brand marketing, supply chain and investing in inventory to help us meet the unparalleled demand for the Under Armour brand. The second is our growth drivers, like international, where we grew the business 69 percent year-to-date, and footwear, where we posted a third-quarter growth rate of 61 percent and continue to invest in world-class talent. And finally, are the new opportunities, like local manufacturing, sportswear and Connected Fitness, that may not meaningfully impact our top-line results in the short term but will bring a new dimension to our model and create new competencies within our organization in the years to come.”
— CEO Kevin Plank during Q3 conference call
Looking Ahead: The company had previously anticipated 2015 net revenues of $3.84 billion, representing growth of 25 percent over 2014, and 2015 operating income in the range of $405 million to $408 million, representing growth of 14 percent to 15 percent over 2014. Under Armour now expects 2015 net revenues of $3.91 billion, representing growth of 27 percent over 2014 and 2015 operating income of $408 million, representing growth of 15 percent over 2014.
Analyst Insights: “Taken altogether, this was a sound quarter, which we believe should satisfy elevated levels of expectations heading into the print. As such, we believe the stock should react favorably to this report, particularly when considering the dearth of solid growth stories in the market today.”
— Camilo Lyon, Canaccord Genuity Inc. analyst
