Zacks_Analysts' Blog : Under Armour Beats, Raises Outlook - Analyst Blog

Under Armour, Inc. (UA), one of the leading developers, marketers and distributors of branded sports apparel, footwear and accessories, recently posted better-than-expected second-quarter 2011 results. The outperformance came on the heels of healthy apparel, footwear and direct-to-consumer businesses, which encouraged management to provide an upbeat outlook.

The quarterly earnings of 12 cents a share beat the Zacks Consensus Estimate by 3 cents and soared 71.4% from 7 cents delivered in the prior-year quarter. Under Armour’s net revenue for the quarter came in at $291.3 million, up 42.3% from the year-ago quarter, and surpassed the Zacks Consensus Estimate of $274 million.

Let’s Dig Deep

The double-digit jump in top-line was driven by an increase of 36.3% in apparel net revenue to $204.8 million, reflecting growth across men’s, women’s and youth apparel businesses, and strength witnessed at Charged Cotton apparel, which is expected to generate about $60 million of net revenue in fiscal 2011.

Footwear net revenue climbed 30.9% to $46.9 million. Under Armour remains optimistic about the strong market for footwear products in 2011. 

Accessories net revenue rose to $32.4 million from $8.9 million in the year-ago quarter by bringing the licensed hats and bags business in-house, beginning January 2011. Management now projects a contribution of $70 million to fiscal 2011 revenue from its hats and bags business, up from $60 million forecasted earlier. Licensing revenue plunged 26.5% to $7.3 million.

Baltimore, Maryland based company, Under Armour, said that direct-to-consumer net revenue surged 81% during the quarter, and now represents 27% of total revenue. Under Armour opened 9 new Factory House stores during the quarter under review, increasing the store count to 72. The company expects to open 7 more Factory House stores during the year bringing the total count to 79 at the end of fiscal 2011.

Despite a 49.3% increase in cost of goods sold, gross profit jumped 34.9% to $134.8 million, whereas gross profit margin contracted 250 basis points to 46.3%, reflecting lower margins from apparel product business and fall in net revenue from licensing businesses, partially offset by sustained growth in the higher-margin direct-to-consumer business. Operating income surged 64.8% to $11.4 million, whereas operating margin expanded 50 basis points to 3.9%.

Other Financial Details

Under Armour ended the quarter with cash and cash equivalents of $119.7 million, total long-term debt of $36.9 million, shareholders’ equity of $538.5 million and a revolving credit facility of $300 million. Capital expenditures were approximately $20 million for the quarter under review. Management now anticipates fiscal 2011 capital expenditures to be at the high end of the previously provided guidance range of $45 million to $50 million.

Management’s Upbeat Guidance

Better-than-expected results, sustained growth in the apparel category and direct-to-consumer channel, and improved outlook for the year, buoyed management to raise fiscal 2011 guidance.

Under Armour now expects fiscal 2011 net revenue between $1,420 million and $1,440 million, representing an increase of 33% to 35%, and operating income between $155 million and $160 million, reflecting a growth of 38% to 42% over the prior-year. As a result, operating margins are expected in the range of 10.9% to 11.1%, up 30 to 50 basis points from the prior-year level. The company’s long-term goal is to achieve net revenue of over $2.1 billion by 2013.

Earlier, Under Armour had forecasted fiscal 2011 net revenue between $1,370 million and $1,390 million, representing an increase of 29% to 31%, and operating income between $149 million and $153 million, reflecting a growth of 33% to 36% over the prior-year.

Currently, Under Armour, which competes with Nike Inc. (NKE), holds a Zacks #1 Rank, which translates into a short-term ‘Strong Buy’ rating.