Under Armour, Inc. 2006 Annual Report (10-K) Summary
Business Context and Reporting Period
This filing covers the fiscal year ended December 31, 2006. Under Armour, Inc. is a developer, marketer, and distributor of branded performance apparel, footwear, and accessories for men, women, and youth. The company operates as a single reportable segment, selling primarily through wholesale distribution (88% of revenue) and direct-to-consumer channels (8% of revenue). Products are sold in approximately 12,000 retail stores globally, with a significant focus on North America.
Key Financial Metrics
| Metric | 2006 | 2005 |
|---|---|---|
| Net Revenues | $430.7 million | $281.1 million |
| Gross Profit | $215.6 million | $135.9 million |
| Gross Margin | 50.1% | 48.3% |
| Income from Operations | $57.3 million | $35.9 million |
| Net Income | $39.0 million | $19.7 million |
| Diluted EPS | $0.79 | $0.36 |
| Cash and Cash Equivalents | $70.7 million | $63.0 million |
| Working Capital | $173.4 million | $134.1 million |
| Total Debt & Capital Leases | $6.3 million | $8.4 million |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 53.2% to $430.7 million, driven by a 53.0% increase in net sales and a 60.8% increase in license revenues.
- Product Expansion: The company launched its footwear line in 2006 (football cleats in Q2, baseball cleats in Q4), generating $26.9 million in sales. While footwear margins are lower than apparel, the category contributed significantly to volume growth.
- Profitability: Operating income grew 59.6% to $57.3 million. Gross margin improved by 180 basis points to 50.1%, aided by lower product costs, decreased close-out sales, and higher direct-to-consumer sales, partially offset by the lower-margin footwear introduction.
- Expense Management: Selling, general, and administrative (SG&A) expenses rose 58.4% to $158.3 million (36.8% of revenue), primarily due to increased marketing costs (including the NFL agreement) and investments in international expansion and infrastructure.
- Tax Rate: The effective tax rate decreased to 34.0% in 2006 from 40.2% in 2005, largely due to the recognition of a new state income tax credit.
Guidance, Outlook, and Risks
- Outlook: Management anticipates continued growth through expanded product offerings (including hunting, fishing, and running categories) and international expansion, particularly in Europe and Japan. Capital investments for 2007 are projected at $20.0 to $22.0 million, focusing on distribution facilities and information technology.
- Seasonality: The business is highly seasonal, with approximately 61% of net revenues and 69% of operating income recognized in the last two quarters of the year.
- Key Risks:
- Customer Concentration: Two customers (Dick's Sporting Goods and The Sports Authority) accounted for approximately 37% of 2006 net revenues.
- Supply Chain: Reliance on third-party manufacturers (four manufacturers produced ~50% of products) and limited fabric suppliers creates vulnerability to disruptions and raw material price fluctuations.
- Competition: Intense competition from larger entities (e.g., Nike, Adidas) with greater resources and brand recognition.
- Brand Authenticity: Dependence on athlete sponsorships and official supplier agreements to maintain brand image; rising costs for these sponsorships could impact margins.
Investor Verification Checklist
- Verify the sustainability of the 53% revenue growth rate given the introduction of lower-margin footwear products.
- Monitor the concentration risk associated with the top two customers representing 37% of total revenue.
- Assess the impact of the new $100 million revolving credit facility and its covenants on future operational flexibility.
- Track the effectiveness of international expansion initiatives in Europe and Japan to diversify revenue streams.
- Review the company's ability to manage inventory levels given the seasonal nature of the business and the risks of demand forecasting errors.