Under Armour Earnings – Behind the Headlines
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Earnings reports are always tense times for shareholders. In this market, unless you get everything right your stock can drop 10%, 15%, or more in a matter of minutes after earnings come out. When your stock sells for about 40 times forward earnings, you have to hold your breath. I would say that Under Armour (NYSE: UA) shareholders can breathe easy at least for now. The company turned in solid results, with net revenues up 23% and EPS up nearly 22%. However, when you're dealing with a company that sells for a high multiple, it's not enough to just read the headline numbers. You need to go behind the headlines to find out if there are trends you need to be aware of. Let's take a look under the hood of Under Armour's most recent quarter.
Kevin Plank, CEO of Under Armour, is quick to point out that the company is seeing the results of investments the company made two years ago. He went further to say the company is investing now to see results in 2014. Since most investors look to Under Armour for growth, this is exactly what the company must do. He said a lot of the right things during the earnings call, talking about hiring people to manage the company better and more efficiently. Under Armour has made investments to make the company's supply chain more efficient while cutting back on SKUs. When it comes to investors expectations, Under Armour lives and dies by just a few numbers. Most investors closely watch sales growth, income growth, and inventories.
Sales Growth is critical for a high flying stock like Under Armour. In the most recent quarter, the company turned in its eighth consecutive quarter of 20%+ top line growth. Even more reassuring to investors, was the expectation that the company would see 21-22% revenue growth for full year 2012. The company saw strong revenue growth in each of its divisions in the last quarter. Apparel, which is still the lion's share of revenues grew by 23%, footwear was up 24%, and direct-to-consumer was up 49%. While the apparel and footwear portions were about as expected, the Under Armour direct-to-consumer division is something to keep an eye on. The company reported that this division jumped from 20% of overall revenues to 25% of overall revenues. Since a lot of money was invested in upgrading the web site and improving the experience, this investment appears to be paying off. While Under Armour can't claim the nearly 100% year-over-year sales growth that Lululemon (NASDAQ: LULU) turned in last quarter, these are still impressive results.
Net income was up 21% and EPS grew by 21.74% in the company's most recent quarter. The forward guidance was important, as the company said it expects full year operating income to grow by 25-26%. Since margins are directly correlated to net income, it must have been reassuring to hear that margins are expected to be relatively flat for this year as well.
The elephant in the room for Under Armour has been inventories. It seems every earnings report, the concern is raised that the company is stuffing the supply chain to show better growth than they are really achieving. To see what trend Under Armour has followed, let's look at the percentage of inventory versus revenues over the last four quarters:
As you can see, while analysts and various news outlets were making a big deal about Under Armour's inventories, they have been steadily declining as a percentage of sales. This suggests that the company's efforts to streamline their product selection are working. As if to put a nail in the coffin of this argument once and for all, CFO Brad Dickerson said, “inventory growth will come in below net revenue growth starting in the third quarter.” The company still has plenty of room for further improvement, as they still show a 64% inventory-to-revenue ratio. Lululemon is growing faster and their ratio of inventory-to-revenue is just 28%.
As I mentioned before, at about 40 times forward earnings, Under Armour is not a stock for the faint of heart. However, with solid 20%+ revenue and EPS growth expected, investors have a better idea of what to expect. The fact that UA has beaten earnings expectations in all of the last four quarters doesn't hurt either. I wouldn't expect a lot of multiple expansion from here, but if the stock tracks earnings growth of about 25-26%, buyers here should be pleased with the results. Let me know what you think of this high flyer in the comments section below.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Lululemon Athletica and Under Armour. Motley Fool newsletter services recommend Lululemon Athletica and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.