Under Armour, Inc. - Form 10-Q Summary (Period Ended September 30, 2007)
Business Context and Reporting Period
This filing covers the quarterly period ended September 30, 2007, and the nine-month period ended on the same date. Under Armour, Inc. is a developer, marketer, and distributor of branded performance apparel, footwear, and accessories. The company operates primarily in North America with expanding international presence in Canada, Europe, and Japan. The company reported strong growth driven by increased unit volume, new product introductions (specifically footwear), and expanded retail distribution.
Key Financial Metrics
| Metric (in thousands) | 9 Months Ended Sep 30, 2007 | 9 Months Ended Sep 30, 2006 | 3 Months Ended Sep 30, 2007 | 3 Months Ended Sep 30, 2006 |
|---|---|---|---|---|
| Net Revenues | $431,723 | $295,406 | $186,863 | $127,745 |
| Gross Profit | $214,197 | $147,194 | $94,517 | $64,675 |
| Gross Margin | 49.6% | 49.8% | 50.6% | 50.6% |
| Operating Income | $58,011 | $39,173 | $33,809 | $21,983 |
| Net Income | $35,683 | $27,128 | $20,030 | $15,970 |
| Diluted EPS | $0.71 | $0.55 | $0.40 | $0.32 |
| Cash and Equivalents (Sep 30, 2007) | $14,473 | (Balance Sheet Item) | ||
| Revolving Credit Facility Borrowed | $10,000 | (Outstanding as of Sep 30, 2007) | ||
| Net Cash Used in Operating Activities | ($46,900) | ($15,856) | (9 Months Comparison) |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 46.1% for the nine months ended September 30, 2007, compared to the prior year. This was driven by a 45.6% increase in net sales and a 60.5% increase in license revenues.
- Product Mix: Footwear sales grew 93.8% year-over-year for the nine-month period, following the introduction of football and baseball cleats. Accessories sales grew 74.3%.
- Operating Expenses: Selling, general, and administrative (SG&A) expenses increased 44.6% to $156.2 million, primarily due to higher marketing costs (up 65.4%) to support brand growth and international expansion. However, SG&A as a percentage of revenue decreased slightly from 36.5% to 36.2%.
- Tax Rate: The effective tax rate for the nine months ended September 30, 2007, was 41.4%, compared to 33.2% in the prior year. Management attributes the higher rate to the expiration of state tax credits received in 2006.
- Cash Flow: Net cash used in operating activities increased significantly to $46.9 million (from $15.9 million used in 2006). This was primarily due to a $49.1 million increase in inventory levels to support anticipated demand and a $59.8 million increase in accounts receivable.
Guidance, Outlook, and Risks
- Marketing Investment: Management plans to invest 10% to 12% of net revenues in marketing for the full year 2007. For 2008, they expect to increase this investment to 12% to 13% of net revenues.
- Capital Expenditures: Total capital investments for 2007 are anticipated to be in the range of $34.0 million to $36.0 million. This includes approximately $12.0 million for distribution facilities, $11.0 million for in-store fixtures, and $7.0 million for Direct-to-Consumer business.
- Liquidity: The company maintains a $100 million revolving credit facility. As of September 30, 2007, $10 million was borrowed, leaving $90 million available. Management believes current cash, operating cash flows, and credit availability are sufficient for the next 12 months.
- Risks: Key risks include the ability to manage rapid growth, maintain effective internal controls, competition leading to price reductions, changes in consumer preferences, and reliance on a limited number of large sporting goods retailers (Customer A accounted for 19.5% of revenue in the first nine months of 2007).
- Seasonality: The company historically recognizes 70% to 75% of its operating income in the last two quarters of the year due to the fall selling season.
Investor Verification Checklist
- Verify the sustainability of the 46% revenue growth rate given the heavy investment in marketing and inventory buildup.
- Monitor the effective tax rate, which is expected to remain higher in 2007 (approx. 41.5%) compared to 2006 (34.0%) due to the loss of state tax credits.
- Assess the impact of the $49 million increase in inventory on future gross margins and potential obsolescence risks, particularly for new footwear lines.
- Review the concentration risk regarding top customers, specifically Customer A, which represented nearly 20% of revenue.
- Track the execution of the $34-$36 million capital expenditure plan, specifically the expansion of distribution facilities and the Direct-to-Consumer channel.