Under Armour, Inc. Q1 2010 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2010. Under Armour, Inc. is a developer, marketer, and distributor of branded performance apparel, footwear, and accessories sold worldwide. The company operates within a single reportable segment.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net Revenues | $229.4 million | $200.0 million |
| Gross Profit | $107.6 million | $89.2 million |
| Gross Margin | 46.9% | 44.6% |
| Operating Income | $13.6 million | $7.9 million |
| Net Income | $7.2 million | $4.0 million |
| Diluted EPS | $0.14 | $0.08 |
| Cash and Equivalents | $166.0 million | $65.6 million |
| Operating Cash Flow | ($11.8 million) used | ($1.8 million) used |
| Long-Term Debt | $17.9 million | $18.3 million |
| Revolving Credit Facility | $0 outstanding | $0 outstanding |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 14.7% year-over-year, driven primarily by a 30.5% increase in apparel sales ($172.6 million) and a 30.2% increase in accessories. This growth was partially offset by a 24.5% decline in footwear sales ($43.0 million), which management had previously indicated would decline in 2010.
- Margin Expansion: Gross margin improved by 230 basis points to 46.9%, attributed to a more favorable apparel product mix, improved outbound freight costs, and increased direct-to-consumer sales. These gains were partially offset by unfavorable wholesale footwear mix and price changes.
- Expense Management: Selling, general, and administrative (SG&A) expenses rose to 41.0% of revenue from 40.6%. Marketing costs decreased as a percentage of revenue (13.6% vs. 16.8%) due to the absence of a major running footwear launch campaign in the prior year, though selling costs increased due to the expansion of factory house stores.
- Cash Flow: Operating cash flow turned negative ($11.8 million used) compared to the prior year ($1.8 million used), primarily due to a larger increase in accounts receivable ($34.6 million outflow) driven by sales growth, and a smaller decrease in inventory levels compared to the prior year.
Guidance, Outlook, and Risks
- Marketing Investment: Management expects to invest in marketing in the range of 12% to 13% of net revenues for the full year 2010.
- Capital Expenditures: Capital investments for 2010 are anticipated to be between $35.0 million and $40.0 million.
- Tax Outlook: The effective tax rate for the quarter was 42.0%, lower than the prior year's 43.8%. Management expects the 2010 annual effective tax rate to improve from the 2009 rate of 43.2%.
- Liquidity: The company maintains a $200 million revolving credit facility with $123.9 million in net availability as of March 31, 2010. Management believes current cash, operating cash flows, and credit facilities are adequate for the next 12 months.
- Risks: Key risks include the ability to manage growth, forecast consumer demand, and navigate foreign currency fluctuations. The company noted that instability in credit markets could impact its ability to obtain additional capital.
Investor Verification Checklist
- Verify the sustainability of the 30%+ growth in apparel sales versus the 24% decline in footwear sales.
- Monitor the impact of the increased accounts receivable balance ($110.3 million) on future working capital requirements.
- Assess the effectiveness of the direct-to-consumer channel expansion in offsetting wholesale footwear weakness.
- Review the company's ability to maintain gross margins above 46% given the shift in product mix and potential liquidation costs.
- Confirm the timeline for the introduction of new basketball footwear and other product categories mentioned in the outlook.