Make Al Bundy Proud, Under Armour
Shawn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Under Armour (NYSE: UA) releases fiscal fourth quarter earnings on January 26th. Investors should be monitoring UA's overall profit growth, international expansion progress and the all important footwear category (Hence the Al Bundy joke in the title) for insight into how UA’s shares could perform in the next few years.
Why is the footwear category so important?
The company has proven that they can succeed in the apparel marketplace as evidenced by their sales growth over the past five years. But it is the footwear category for which success has been elusive. The company launched footwear products a few years ago but market conditions and poor execution provided mixed results (see chart below.) Management recently tweaked their footwear offerings to offer products they believe would be well received by consumers.
The sucess of the new footwear offerings will show investors that management can develop products and channels beyond their bread and butter performance apparel segment. Footwear is also a natural extension of the brand as the company can leverage existing athlete and retailer relationships to give them extra attention towards the product. Opportunity in the domestic athletic footwear market is very large with some analysts estimating annual sales of $18 billion.
One downside is that the market is entrenched by Nike (NYSE: NKE), which rings in annual footwear sales of $5.4 billion including a monopolistic 90% market share in the $2.5 billion basketball shoe market. In a potential David vs. Goliath scenario, UA shouldn’t fret at attacking NKE as retailers are a potential ally in this endeavor. Any opportunity retailers can diversify vendors is usually welcomed. For additional reading, see my recent article on the importance of sales diversification.
How should investors determine if the quarter was successful? Quite simply, the company needs to prove that the newer footwear offerings are gaining traction with consumers. This can be analyzed more by sales growth than net income as profit can be weighed down by input costs. Revenue of $50-$60 million is the target that I believe would demonstrate traction.
Given that Nike receives about 63% of their sales from outside the United States compared to UA’s 7%, the casual investor might believe that rapid growth in the international market is the most important metric to watch from UA in the quarter. Indeed, the international market is very important for the company as it is a tremendous source for potential growth. But investors should temper their expectations as international expansion takes patience. Expansions require analyzing, investing and adjusting their strategies frequently, and often per country to succeed. Heck even Nike, who is considered the king of the international sports sale, didn’t receive 20% of their sales internationally until 1985, a good 13 years after incorporation.
What should investors be looking for the quarter? UA has grown their international sales at a healthy pace in the past few years (see chart below). But similar to the footwear category, it is the traction that is the most important factor to watch. How did the international stores perform? How much did the company successfully invest in manufacturing, operations and sales teams? What is the outlook for the current year given the instability of the various regions UA is expanding into? These are the questions that investors should be monitoring and asking management.
Analysts are estimating that the company will earn $0.61 per share for the quarter on revenues of around $405 million. This is down 30% quarter over quarter but up almost 39% year over year. With the fourth quarter during the holiday season, analysts are expecting sales growth in all company segments. Any disappointment in net margin could come at the hands of higher input costs realized in the quarter. Cotton costs are expected to put downward pressure on UA’s margins as the company was forced to make purchases in the spring when the commodity was at its all time high. The positive wild card could be revenue from the accessories segment. The segment sells UA branded items like hats and bags. Revenues have grown from $40 million in Q311 from $24 million in Q111 (One side note - prior years can’t be compared as the company previously licensed these products until Jan. 1, 2011.)
What do you believe is important for UA’s shareholders to monitor? How you will you monitor these segments going forward? Share your comments in the discussion section below.
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