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, 2007. Under Armour is a developer, marketer, and distributor of branded performance apparel, footwear, and accessories. The company operates primarily in North America with expanding international presence in Canada, Europe, and Japan.
Key Financial Metrics
Performance (Six Months Ended June 30, 2007):
- Net Revenues: $244.9 million (up 46.0% from $167.7 million in 2006).
- Gross Profit: $119.7 million (Gross Margin: 48.9%, down 30 basis points from 49.2% in 2006).
- Operating Income: $24.2 million (Operating Margin: 9.9%, down from 10.3% in 2006).
- Net Income: $15.7 million (up 40.3% from $11.2 million in 2006).
- Diluted EPS: $0.31 (up from $0.23 in 2006).
Liquidity and Balance Sheet (as of June 30, 2007):
- Cash and Cash Equivalents: $25.7 million (down from $70.7 million at year-end 2006).
- Total Assets: $317.9 million.
- Total Liabilities: $82.6 million.
- Debt: No outstanding balance on the $100 million revolving credit facility. Subordinated debt principal balance was $4.3 million.
- Working Capital: Significant increase in inventory ($128.8 million) and accounts receivable ($83.1 million) to support growth and the fall selling season.
Cash Flow (Six Months Ended June 30, 2007):
- Operating Cash Flow: Net cash used of $32.5 million (compared to $18.4 million used in 2006), driven by increased inventory and receivables.
- Investing Cash Flow: Net cash used of $16.3 million, primarily for capital expenditures in distribution facilities and IT systems.
- Financing Cash Flow: Net cash provided of $3.8 million.
Material Changes vs. Prior Period
- Revenue Growth: Driven by a 49.6% increase in net sales and a 76.8% increase in license revenues for the quarter. Footwear sales grew 104.9% year-over-year for the six-month period following the 2006 launch.
- Margin Compression: Gross margin decreased slightly due to the introduction of lower-margin footwear products and increased sales allowances, partially offset by lower customer incentives and higher-margin direct-to-consumer sales.
- Expense Increases: Selling, general, and administrative (SG&A) expenses rose to $95.5 million (39.0% of revenue) from $65.3 million (38.9% of revenue). Marketing costs increased significantly due to NFL promotional rights, new athlete sponsorships, and international expansion.
- Inventory Build: Inventory levels increased by $47.7 million compared to the prior year-end to prepare for the peak fall selling season.
Guidance, Outlook, and Risks
Outlook and Strategy:
- Management expects the 2007 annual effective tax rate to be approximately 41.3%, higher than the 34.0% rate in 2006 due to the expiration of state tax credits.
- Marketing spend is targeted at 10% to 12% of net revenues annually, though Q2 exceeded this range due to timing of investments.
- Capital investment for 2007 is projected between $34.0 million and $36.0 million, focusing on distribution facility expansion, warehouse management systems, and direct-to-consumer retail.
- Future product launches include non-cleated performance training footwear in 2008.
Risks and Contingencies:
- Seasonality: Approximately 70-75% of operating income is historically recognized in the last two quarters of the year.
- Customer Concentration: Three major customers accounted for 39.3% of net revenues in the first six months of 2007.
- Inventory Risk: High inventory levels are necessary for the fall season but carry risks of obsolescence if demand forecasts are inaccurate.
- Foreign Exchange: While currently immaterial, increasing international sales expose the company to currency fluctuation risks.
Investor Verification Checklist
- Verify the sustainability of the 46% revenue growth rate, particularly in the footwear category which has lower margins than apparel.
- Monitor inventory turnover and gross margin trends in the upcoming fall quarter to ensure the significant inventory build converts to sales without excessive markdowns.
- Assess the impact of the higher effective tax rate (41.3%) on future net income projections.
- Review the execution of the $34-36 million capital expenditure plan, specifically the expansion of distribution capabilities to support footwear growth.
- Track the performance of international markets and the effectiveness of hedging strategies as foreign revenue exposure increases.