Under Armour, Inc. 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for Under Armour, Inc., covering the period ended June 30, 2009. Under Armour is a developer, marketer, and distributor of branded performance apparel, footwear, and accessories sold worldwide. The company operates as a single reportable segment.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Net Revenues | $364.6 million | $314.0 million |
| Gross Profit | $164.8 million | $145.7 million |
| Gross Margin | 45.2% | 46.4% |
| Operating Income | $11.3 million | $7.6 million |
| Net Income | $5.4 million | $4.2 million |
| Diluted EPS | $0.11 | $0.08 |
| Cash from Operations | $7.3 million | ($22.4 million) |
| Cash and Equivalents (End of Period) | $79.5 million | $13.3 million |
| Total Debt (Current + Long Term) | $20.1 million | $45.1 million |
Note: Debt figures reflect the repayment of the prior revolving credit facility balance of $25.0 million in January 2009. The new $200.0 million facility had no outstanding borrowings as of June 30, 2009.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 16.1% year-over-year, driven by a 50.9% surge in footwear sales (due to the Q1 2009 launch of performance running footwear) and an 8.4% increase in apparel sales.
- Margin Compression: Gross margin decreased 120 basis points to 45.2%. This was primarily due to increased reserves for sales returns and footwear markdown allowances, less favorable apparel product mix, and higher inbound logistics costs.
- Operating Efficiency: Operating income grew 48.9% to $11.3 million. Selling, general, and administrative (SG&A) expenses as a percentage of revenue improved to 42.1% from 44.0%, despite a $15.4 million absolute increase in expenses driven by marketing and supply chain investments.
- Liquidity Improvement: Operating cash flow swung from a $22.4 million outflow in 2008 to a $7.3 million inflow in 2009. This was largely due to a $18.5 million reduction in inventory investment and improved management of accrued expenses.
Guidance, Outlook, and Risks
- Marketing Investment: Management expects to invest 12% to 13% of net revenues in marketing for the full year 2009.
- Capital Expenditures: Full-year 2009 capital investments are anticipated to range between $30.0 million and $35.0 million, lower than the $41.1 million invested in 2008.
- Tax Outlook: 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 expects a significant portion of operating income to be recognized in the last two quarters of the year, consistent with historical trends driven by fall sports and the COLDGEAR line.
- Risks: Key risks include instability in credit markets affecting financing, consumer spending trends, competition, and the ability to forecast demand and manage inventory. The company notes that while it has adequate liquidity for the next 12 months, further economic weakening could adversely affect operations.
Investor Verification Checklist
- Inventory Management: Verify the sustainability of the reduced inventory investment and the impact of increased liquidation sales on future gross margins.
- Footwear Trajectory: Assess whether the 50.9% growth in footwear sales is a one-time launch effect or indicative of sustained category expansion.
- Debt Covenants: Confirm continued compliance with leverage and fixed charge coverage ratios under the new $200 million revolving credit facility.
- Customer Concentration: Review the top three customers, which accounted for approximately 35.8% of net revenues in the first six months of 2009.
- Stock-Based Compensation: Monitor the vesting conditions of performance-based stock options tied to operating income targets, as no expense has been recorded yet due to uncertainty in achieving these targets.