I will be very straight forward. This morning, Under Armour had reported its 2009 third quarter financial status, and quite frankly, I thought it was a great quarter. From Under Armour’s website came the following facts:
• Net Revenues Increased 16.2% to $269.5 Million
• Net Income Increased to $26.2 Million; Diluted EPS of $0.52
• Cash & Cash Equivalents Increased $53.2 Million Year-Over-Year to $93.4 Million at Quarter-End; No Borrowings Outstanding Under $200 Million Revolving Credit Facility
• Inventory Decreased 6.6% to $152.8 Million at Quarter-End
• Company Raises 2009 Net Revenues Outlook to $830 Million to $835 Million (+14% to +15% over 2008) from $810 Million
• Company Raises 2009 EPS Outlook to $0.85 to $0.87 (+10% to +13% over 2008) from $0.80 to $0.82
- http://investor.underarmour.com/releasedetail.cfm?ReleaseID=418803
This entire quarter, the street and other financial sources only talk about ‘top line growth’ – it is all about top line growth to see if the economy is healing, consumers are spending, and companies are doing better from not just slashing costs in whatever ways possible. Last quarter, cost cutting is what led many stocks to beat expectations and thus create an earnings rally. Under Armour’s top line growth of 16% was very interesting and bullish to me. Being a holder of call options in UA, I was not just very disappointed to see the stock sell off as much as 12% today, but puzzled as to how such downside could occur.
In several articles that I read today, reporters kept saying that Under Armour posted quarterly earnings that well beat Wall Street estimates and the company raised its full-year outlook, but the forecast implies a weaker-than-expected fourth quarter. How contradicting is that? They raised their outlook, but the forecast is expected to be weak? If I am missing something, I hope someone explains.
Taking this a step further, what I believe drove the stock price down was how Under Armour said that its personnel costs and selling, general, and administrative expenses would increase for 2009. However, the increase in expenses would be only from the low-teens, which was the previous outlook, to the mid-teens. Not to mention, the expenses are associated with an increase in funding for Under Armour’s performance incentive plan and for the continued expansion of their factory house outlet stores. How is that bad? To me, it signals growth.
So again, why would I hear “raised outlook, forecast implies weaker-than-expected outlook?” It makes absolutely no sense! One analyst said how revenue growth would slow in Q4 yet I cannot jump on that when every one of UA’s segments did well. What about the football season underway? That is worth estimating as Steven Louis told me. How could Nike soar on their quarter and Under Armour not? Nike’s first fiscal quarter of 2010 gross margins were 46.2% compared to 47.2% the same period one year ago. Under Armour, on the other hand, had gross margins for their third quarter for 2009 of 49.7% compared to 51% for the same quarter a year earlier. This decline in UA’s gross margins also seemed like a reason to bash the stock today. However, I do not see why considering that UA’s gross margins are more attractive than Nike’s. I think that is worth pointing out. And the last point I will make: the growth in the athletic apparel industry is in Under Armour. Consider the following results that derived from the Nike and Under Armour website, respectively:
- Revenue for Greater China during the first quarter was down 16 percent to $416 million compared to $496 million last year. Footwear revenue was down 17 percent to $218 million, apparel revenue declined 16 percent to $168 million, and equipment revenue decreased 16 percent to $29 million.
- Kevin Plank, Chairman and CEO of Under Armour, Inc., stated, "The strength and diversity of our growth platform enabled us to deliver meaningful top line growth during the quarter with all product categories up for the period.
Excuse the outrage, but I still believe there is much more upside in Under Armour opposed to Nike. Maybe, Nike should think about buying Under Armour? It is just a matter of time for UA to start crushing Nike’s toes.
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2 comments:
I'm not gonna say that I understand why UA dropped over 12% today, but I do think that there are a few negatives in this company and in it's earnings report today.
First of all yesterday the stock was up 5% on expectations that the earnings were going to beat WallStreet expectations. Taking this into consideration brings the stock down 7% instead of 12% (just wanted to point that out).
UA is a company that sells performance apparel, footwear, and accessories, with a majority of their revenue coming from apparel. This is why I thought it was very important to see which section of their business revenue grew this past quarter.
This is what I found out:
"Quarterly profit rose 2 percent to $26.2 million, or 52 cents per share, from $25.7 million, or 51 cents per share last year.
Revenue rose 16 percent to $269.5 million from $231.9 million a year ago.
Analysts polled by Thomson Reuters, on average, predicted a profit of 44 cents per share on revenue of $249.9 million.
Sales of apparel rose 7 percent to $215.4 million, while footwear more than doubled to $33 million, from $13.1 million last year."
Now even though I was very impressed that footwear sales doubled from last year, I was disappointed to see that apparel rose only 7%. This is significant because apparel sales is almost 7 times larger in terms of revenue for the company then footwear is. It seems to me that UA has taken their focus off their main products while trying to improve their secondary products, such as footwear. This is not a good business plan for AU, and deciding to compete with companies such as Nike, Adidas, Reebok, ext. (which are all such strong brand names in the footwear sector) in footwear is a bad idea. I personally don't understand when companies take their focus off their leading products and focus on other ventures instead of improving the products that built them up in the first place.
I would also like to point out that beating last years revenue doesn't really impress me since the economy was in such a downward spiral at the time and UA's stock price was fluctuating around $25 this time one year ago. In 2007 when the stock price was fluctuating around the $50-$55/share the Net Income for the company was about 40% higher than it was in 2008. Personally I was expecting a larger growth in revenue to help them get back to their 2007 levels.
http://finance.yahoo.com/q/is?s=UA&annual
Although I feel that what I just described is important it isn't the reason that UA's stocked dropped today. The reason that the stock price dumped today was because of the announcement that next quarters earnings are going to be half that of the current quarters.
"Under Armour, a smaller challenger to Nike Inc (NKE.N), said sales gains in its apparel and footwear business led to third-quarter net income of $26.2 million, or 52 cents per share, up from $25.7 million, or 51 cents per share, a year earlier.
Analysts on average had been expecting earnings of 44 cents per share, according to Thomson Reuters I/B/E/S.
Given its strong third-quarter results, the full-year forecast implies fourth-quarter earnings of 23 cents to 25 cents per share, said Stifel Nicolaus analyst Thomas Shaw. That is below the 28 cent-per-share average estimate of analysts polled by Thomson Reuters I/B/E/S."
This announcement is very unusual to me. Why is it that before a quarter even begins you are predicting that your earnings will only be only 50% that of the previous quarter? Obviously a stock price is a reflection of future earnings for a company, and it doesn't seem that the future earnings for UA is going anywhere good, anytime soon.
Steven Aaron highlights a definite cause for concern in UA's full year '09 forecast. Under Armour just raised that forecast to $0.85 - $0.87 eps for the full year. With UA having reported $.08 eps for Q1 2009, $.03 eps for Q2, and now $0.52 eps for Q3, that puts the company's Q4 estimates at $0.22 - $0.24 eps. As Steven points out, this is an enormous red flag. Unless the plan is to raise estimates several times throughout the quarter to bolster stock price, UA is predicting that their earnings will be cut in half for the quarter that should be their strongest.
I will dig a bit deeper into the report but I would put my money on the estimates being intentionally "over cautious" so as to spark a rally as the guidance gets repeatedly raised.
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