Under Armour, Inc. 10-Q Summary: Period Ended June 30, 2008
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for Under Armour, Inc., covering the three and six months ended June 30, 2008. Under Armour is a developer, marketer, and distributor of branded performance apparel, footwear, and accessories. The company operates within a single reportable segment and sells products globally, with a significant majority of revenue generated in the United States.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2008 | Six Months Ended June 30, 2008 |
|---|---|---|
| Net Revenues | $156,677 | $314,019 |
| Gross Profit | $70,904 | $145,739 |
| Gross Margin | 45.3% | 46.4% |
| Operating Income | $3,274 | $7,573 |
| Net Income | $1,375 | $4,245 |
| Diluted EPS | $0.03 | $0.09 |
| Cash and Cash Equivalents | $13,325 (as of June 30, 2008) | N/A |
| Total Debt (Current + Long Term) | $28,892 (Principal) | N/A |
| Operating Cash Flow | N/A | ($22,446) Used |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 30.0% ($36.1 million) for the quarter and 28.2% ($69.1 million) for the six-month period compared to 2007. This was driven primarily by a 128.8% increase in footwear sales (due to the launch of performance training footwear) and growth in apparel categories.
- Profitability Decline: Despite revenue growth, Net Income decreased 76.0% for the quarter and 72.9% for the six-month period. Operating income dropped 59.9% for the quarter and 68.7% for the six-month period.
- Margin Compression: Gross margin decreased 370 basis points for the quarter and 250 basis points for the six-month period. This was primarily due to the lower-margin footwear mix and higher inbound transportation costs.
- Expense Increases: Selling, general, and administrative (SG&A) expenses rose significantly, increasing 32.8% for the quarter and 44.7% for the six-month period. Marketing costs increased to support the footwear launch and brand expansion.
- Cash Position: Cash and cash equivalents decreased from $40.588 million at year-end 2007 to $13.325 million at June 30, 2008, reflecting heavy investment in inventory and capital expenditures.
Guidance, Outlook, and Risks
- Marketing Investment: Management expects to increase marketing investments to 12%–13% of net revenues for the full year 2008, up from the historical 10%–12% range.
- Capital Expenditures: Full-year 2008 capital investments are anticipated to be between $40.0 million and $42.0 million, focusing on branded concept shops, in-store fixtures, and IT infrastructure.
- Seasonality: The company notes that a significant portion of income is historically recognized in the last two quarters. In 2008, a larger portion of income is expected in the second half due to the timing of marketing investments shifting to the first half.
- Tax Rate: The expected effective tax rate for 2008 is 42.6%, an increase from 41.0% in 2007, primarily due to a state income tax rate increase in Maryland.
- Risks: Key risks include the ability to forecast consumer demand, competition, supply chain disruptions, and the impact of foreign currency exchange rates on international operations.
Investor Verification Checklist
- Verify the sustainability of the 128.8% footwear sales growth following the initial launch of performance training footwear.
- Monitor the trajectory of gross margins as the lower-margin footwear mix continues to expand relative to apparel.
- Assess the impact of increased marketing spend (12%–13% of revenue) on future operating leverage.
- Review inventory levels and turnover ratios to ensure the company's initiatives to improve inventory efficiency are effective.
- Confirm the company's ability to maintain liquidity given the significant decrease in cash reserves and increased debt utilization.