UAA

Under Armour, Inc. 2009 Annual Report (10-K) Summary

Business Context and Reporting Period

This filing covers the fiscal year ended December 31, 2009. Under Armour, Inc. is a leading developer, marketer, and distributor of branded performance apparel, footwear, and accessories. The company operates within a single reportable segment and sells products globally through wholesale distribution (78% of revenue), direct-to-consumer channels (18%), and licensing (4%). The company is incorporated in Maryland and trades on the NYSE under the symbol "UA."

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 18.1% to $856.4 million, driven primarily by a 60.6% surge in footwear sales (due to the launch of performance running footwear) and 12.6% growth in apparel sales.
• Margin Compression: Gross margin decreased 70 basis points to 48.2%. This was attributed to increased liquidations, a less favorable product mix (higher proportion of lower-margin footwear), and increased inventory reserves, partially offset by higher-margin direct-to-consumer sales.
• Expense Management: Selling, general, and administrative (SG&A) expenses increased 17.9% to $327.8 million but remained stable as a percentage of revenue (38.2%). Marketing costs rose to $106.1 million (12.4% of revenue) due to new sponsorships and the NFL Scouting Combine, though media expenditures were lower than the prior year.
• Liquidity Improvement: Cash and cash equivalents grew by $85.3 million to $187.3 million. The company repaid its prior $25.0 million revolving credit facility balance and entered a new $200.0 million facility, ending the year with no outstanding balance on the revolver.
• Inventory Reduction: Inventory levels decreased by $33.7 million to $148.5 million, reflecting operational initiatives to improve inventory management and increased liquidation sales.

Guidance, Outlook, and Risks

• Marketing Outlook: Management expects marketing investments for 2010 to range between 12% and 13% of net revenues.
• Capital Expenditures: Capital expenditures for 2010 are expected to be in the range of $35 million to $40 million.
• Strategic Shifts: The company plans to bring headwear and bags in-house starting in 2011, ending reliance on licensees for these categories. Continued expansion of the direct-to-consumer channel and international markets is a key growth driver.
• Risk Factors:
  • Economic Sensitivity: Products are discretionary; a recession could materially harm sales.
  • Customer Concentration: Two customers (Dick's Sporting Goods and The Sports Authority) accounted for approximately 30% of 2009 net revenues.
  • Supply Chain: Reliance on third-party manufacturers (60% in Asia) and limited fabric suppliers creates vulnerability to disruptions and raw material price fluctuations.
  • Competition: Intense competition from larger entities (Nike, Adidas) with greater resources and brand recognition.

Key Investor Verification Points

• Footwear Execution: Verify the sustainability of the 60% footwear growth rate and the success of the new running footwear category in a competitive market.
• Inventory Health: Monitor inventory turnover and reserve levels to ensure the 2009 reduction was not achieved through excessive discounting that could erode brand equity.
• Customer Concentration: Assess the stability of relationships with the top two customers, which represent nearly one-third of total revenue.
• Margin Recovery: Track whether gross margins can stabilize or improve as the product mix shifts and liquidation pressures subside.
• Debt Covenants: Confirm continued compliance with the leverage ratio (max 2.5) and fixed charge coverage ratio (min 1.25) under the new $200 million credit facility.