Under Armour, Inc. Q1 2007 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2007. Under Armour, Inc. is a developer, marketer, and distributor of branded performance apparel, footwear, and accessories. The company operates within one reportable segment but manages operations across North America and International regions. As of March 31, 2007, the company had approximately 12,000 retail store locations globally.
Key Financial Metrics
| Metric | Q1 2007 | Q1 2006 |
|---|---|---|
| Net Revenues | $124.3 million | $87.7 million |
| Gross Profit | $60.6 million | $44.3 million |
| Gross Margin | 48.7% | 50.5% |
| Operating Income | $16.0 million | $14.2 million |
| Net Income | $9.9 million | $8.7 million |
| Diluted EPS | $0.20 | $0.18 |
| Cash and Equivalents | $57.2 million | $70.7 million (Dec 31, 2006) |
| Operating Cash Flow | ($8.2 million) used | ($1.8 million) used |
| Debt Obligations | $5.0 million (Subordinated) | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 41.8% year-over-year, driven by a 41.5% increase in net sales and a 50.9% increase in license revenues.
- Product Mix: Footwear sales contributed $11.8 million in Q1 2007, a new category introduced in late 2006. Youth apparel sales grew 49.0%.
- Margin Compression: Gross margin decreased 180 basis points to 48.7%. This was primarily due to the lower margins of the new footwear line, temporary vendor sourcing costs, and increased sales returns/allowances.
- Expense Increases: Selling, general, and administrative (SG&A) expenses rose 47.8% to $44.5 million. Marketing costs increased $6.3 million, largely due to NFL promotional rights, print advertising, and international expansion.
- Cash Flow: Operating cash flow turned negative at $8.2 million used, compared to $1.8 million used in the prior year. This was driven by a $5.6 million increase in accounts receivable and higher customer discounts paid.
Outlook, Risks, and Management Commentary
- Guidance: Management expects the 2007 annual effective tax rate to be approximately 40.8%, higher than the 34.0% rate in 2006 due to the absence of specific state tax credits earned in the prior year. Marketing spend is targeted at 12% of net revenues for the full year 2007.
- Capital Expenditures: Total capital investments for 2007 are anticipated to range between $34.0 million and $36.0 million. Key investments include $12.0 million for distribution facility expansion and $11.0 million for in-store fixtures.
- Liquidity: The company maintains a $100 million revolving credit facility with $99.9 million available as of March 31, 2007. No balance was outstanding on the revolver during the quarter. Management believes current cash and credit facilities 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, and the ability to accurately forecast consumer demand. The company also faces risks related to supplier performance and changes in general economic conditions.
- Accounting Changes: The company adopted FIN 48 (Accounting for Uncertainty in Income Taxes) on January 1, 2007, resulting in a $1.2 million decrease to retained earnings.
Investor Verification Checklist
- Verify the sustainability of the 41.8% revenue growth rate, particularly the contribution from the new footwear category.
- Monitor gross margin trends as the footwear product mix expands, given the current margin compression.
- Review the trajectory of operating cash flow, specifically the impact of increasing accounts receivable and inventory levels ahead of the fall season.
- Assess the impact of the higher effective tax rate (approx. 40.8%) on future net income projections.
- Confirm compliance with debt covenants, specifically the leverage and fixed charge coverage ratios tied to the revolving credit facility.