Under Armour Beats, Guides High

Under Armour Inc. (UA - Snapshot Report), one of the leading developers, marketers and distributors of branded sports apparel, footwear and accessories, recently posted better-than-expected second-quarter 2012 results. The quarterly earnings of 6 cents a share beat the Zacks Consensus Estimate by a penny. However, earnings remained flat when compared with the prior-year quarter.

Net revenue came in at $369.5 million, up 26.8% from the year-ago quarter, and outpaced the Zacks Consensus Estimate of $359 million.

The company outdid expectations on the back of new and innovative products introduced to boost market share while consequently raising its fiscal 2012 guidance.

Category Details

The double-digit jump in the top-line was driven by a 23.5% increase in apparel net revenue to $252.8 million, reflecting growth across men’s, women’s and youth apparel businesses, and innovative products such as Studio product and Armour Bra.

Footwear net revenue soared 43.8% to $67.4 million, due to the new running footwear introduced in 2012. Under Armour remains optimistic about a healthy market for footwear products.

Accessories net revenue rose 21.1% to $39.2 million during the quarter, reflecting healthy performance of bags business. The company has completely passed the transition phase from the licensed hats and bags business to in-house. Licensing revenue increased 37.1% to $10 million.

Baltimore, Maryland-based Under Armour announced that direct-to-consumer net revenue surged 35% during the quarter, representing 29% of total revenue. Under Armour opened eight new Factory House stores during the quarter under review, increasing the store count to 92.

Margins

Despite a 27.8% jump in cost of goods sold, gross profit rose 25.7% to $169.5 million. However, gross profit margin contracted 40 basis points to 45.9%, reflecting lower margins from North American apparel and accessories product business. Operating income grew 3.2% to $11.7 million, whereas operating margin shriveled 70 basis points to 3.2%.

Other Details

Under Armour ended the quarter with cash and cash equivalents of $142.9 million, total long-term debt of $73.9 million and shareholders’ equity of $689.1 million. The increase in the long-term debt from the prior-year quarter reflects the acquisition of corporate headquarters in July 2011. The company had no borrowings under its revolving credit facility of $300 million at the end of the quarter.

Capital expenditures were approximately $15 million for the quarter under review. Management now expects fiscal 2012 capital expenditures between $60 million and $65 million.

Strolling Through Guidance

Under Armour expects fiscal 2012 revenue between $1.8 billion and $1.82 billion, reflecting year-over-year growth of 22% to 24%. Earlier, management had forecasted revenue growth between $1.78 billion and $1.80 billion, indicating a year-over-year growth of 21% to 22%.

Gross margin is expected to remain flat to marginally down compared with the prior year. Operating income is now projected in the range of $205 million to $207 million for fiscal 2012, indicating a growth of 26% to 27% from the prior year. Earlier, management expected operating income in the range of $203 million to $205 million.

Under Armour maintains strict control over its brand image, with an in-house marketing and promotions department, engaged in designing and advertising while cautiously controlling the distribution of its products.

The company offers substantial growth opportunities in the long term through geographic, product/category and direct-to-consumer expansion. Based on Under Armour’s well established brand name, we expect the company to continue to benefit from longer-term shifting trends toward performance-based products within the industry.

Currently, Under Armour, which competes with Nike Inc. (NKE - Analyst Report) and Columbia Sportswear Company (COLM - Snapshot Report), holds a Zacks #3 Rank that translates into a short-term Hold rating.