Under Armour, Inc. 2007 Annual Report (10-K) Summary
Business Context and Reporting Period
This filing covers the fiscal year ended December 31, 2007. Under Armour, Inc. is a developer, marketer, and distributor of branded performance apparel, footwear, and accessories for men, women, and youth. The company operates as a single reportable segment, selling primarily through wholesale distribution to retail stores, with growing direct-to-consumer and licensing channels. Products are manufactured by unaffiliated third parties in 15 countries.
Key Financial Metrics
| Metric | 2007 | 2006 |
|---|---|---|
| Net Revenues | $606.6 million | $430.7 million |
| Gross Profit | $305.0 million | $215.6 million |
| Gross Margin | 50.3% | 50.1% |
| Income from Operations | $86.3 million | $56.9 million |
| Operating Margin | 14.2% | 13.2% |
| Net Income | $52.6 million | $39.0 million |
| Diluted EPS | $1.05 | $0.79 |
| Cash & Equivalents | $40.6 million | $70.7 million |
| Working Capital | $226.5 million | $173.4 million |
| Total Debt | $14.3 million | $6.3 million |
Cash Flow: Net cash used in operating activities was $14.6 million in 2007, compared to $10.7 million provided in 2006. This shift was driven by a $57.5 million increase in inventory levels to support anticipated demand and growth in accounts receivable.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 40.8% year-over-year. Growth was driven by unit volume increases in apparel, a 52.1% surge in footwear sales (football and baseball cleats), and a 95.0% jump in accessories sales.
- Profitability: Operating income grew 51.6% to $86.3 million. Gross margin improved slightly by 20 basis points, aided by lower customer incentives and higher-margin direct-to-consumer sales, partially offset by higher product costs and increased reserves for sales returns.
- Expense Management: Selling, general, and administrative (SG&A) expenses rose 37.9% to $218.8 million but decreased as a percentage of revenue from 36.9% to 36.1%. Marketing costs increased to $71.2 million (11.7% of revenue) due to new team sponsorships and international expansion.
- Inventory Build: Inventory nearly doubled to $166.1 million from $81.0 million, reflecting a strategic decision to stock core products and prepare for the fall selling season.
Guidance, Outlook, and Risks
- Outlook: Management expects to increase marketing investments to 12-13% of net revenues in 2008. Capital investments for 2008 are anticipated to range between $40.0 million and $42.0 million, focusing on retail stores, IT infrastructure, and distribution facilities.
- Product Expansion: The company plans to introduce non-cleated performance training footwear in May 2008.
- Key Risks:
- Customer Concentration: Two customers (Dick's Sporting Goods and The Sports Authority) accounted for approximately 33% of 2007 net revenues.
- Supply Chain: Reliance on third-party manufacturers and limited fabric suppliers; 70-75% of fabric came from six suppliers.
- Competition: Intense competition from larger entities like Nike and adidas with greater resources.
- Seasonality: Significant portion of income is recognized in the last two quarters of the year.
Investor Verification Checklist
- Verify the sustainability of the 40% revenue growth rate given the high inventory build-up ($166M) and potential for future markdowns if demand softens.
- Monitor the concentration risk associated with the top two retail customers representing one-third of total revenue.
- Assess the impact of rising marketing spend (projected 12-13% of revenue) on future operating margins.
- Review the execution of the new non-cleated footwear launch in 2008 and its ability to drive growth beyond the core apparel business.
- Confirm the company's ability to manage working capital requirements as inventory levels remain elevated.