Under Armour, Inc. 10-Q Summary: Period Ended September 30, 2009
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for Under Armour, Inc., covering the three and nine months ended September 30, 2009. Under Armour is a developer, marketer, and distributor of branded performance apparel, footwear, and accessories sold globally. The company operates within a single reportable segment.
Key Financial Metrics
| Metric (Nine Months Ended Sep 30, 2009) | Value (in thousands) |
|---|---|
| Net Revenues | $634,194 |
| Gross Profit | $298,884 |
| Gross Margin | 47.1% |
| Operating Income | $58,340 |
| Net Income | $31,583 |
| Diluted EPS | $0.62 |
| Cash and Cash Equivalents | $93,376 |
| Net Cash Provided by Operating Activities | $25,657 |
| Revolving Credit Facility Availability | $158.7 million |
| Long-Term Debt (Principal) | $18.1 million |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 16.2% to $634.2 million for the nine months ended September 30, 2009, compared to $546.0 million in the prior year. This was driven primarily by a 68.6% increase in footwear sales (due to the running footwear launch) and a 7.8% increase in apparel sales.
- Margin Compression: Gross margin decreased 130 basis points to 47.1% (from 48.4% in 2008). This decline was attributed to increased liquidations, higher inventory reserves, and a less favorable product mix, partially offset by higher-margin direct-to-consumer sales.
- Operating Expenses: Selling, general, and administrative (SG&A) expenses increased 14.6% to $240.5 million. However, as a percentage of revenue, SG&A decreased to 37.9% from 38.5%, aided by revenue growth.
- Cash Flow: Net cash provided by operating activities improved significantly to $25.7 million from $6.6 million in the prior year, driven by better inventory management and changes in working capital.
- Debt Structure: In January 2009, the company replaced its $100 million revolving credit facility with a new $200 million facility. The prior facility was fully repaid, and no borrowings were outstanding on the new facility as of September 30, 2009.
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 2009.
- Capital Expenditures: Full-year 2009 capital investments are anticipated to be between $30.0 million and $35.0 million, lower than the $41.1 million invested in 2008.
- Tax Rate: The annual effective tax rate for 2009 is expected to be approximately 44.3%, lower than the 2008 rate of 45.3% due to sourcing and tax strategies.
- Seasonality: The company historically recognizes a significant portion of income in the last two quarters of the year. A larger portion of 2009 income is expected in the latter half due to a shift in marketing investment timing to the first two quarters.
- Risks: Key risks include general economic conditions affecting consumer spending, the ability to forecast demand and manage inventory, competition, and instability in credit markets affecting financing availability.
Investor Verification Checklist
- Inventory Management: Verify the effectiveness of inventory reduction initiatives, as inventory levels decreased significantly ($29.5 million) compared to the prior year, contributing to cash flow but potentially impacting future sales if understocked.
- Footwear Sustainability: Assess the sustainability of the 68.6% growth in footwear sales following the Q1 2009 launch of performance running footwear.
- Margin Pressures: Monitor the impact of liquidations and inventory reserves on gross margins, which compressed by 130 basis points year-over-year.
- Customer Concentration: Review the concentration of credit risk, as the top three customers accounted for approximately 35.7% of net revenues for the nine months ended September 30, 2009.
- Debt Covenants: Confirm continued compliance with leverage and fixed charge coverage ratios under the new $200 million revolving credit facility.