Under Armour aces 3Q

Profit zooms 90% at athletic apparel maker

local firm's sales rise 48%

gross margins improve

November 01, 2006|By Paul Adams | Paul Adams,Sun reporter

Under Armour Inc. reported yesterday that third-quarter profit nearly doubled and that its gross margins - a point of concern for some industry analysts - rebounded as quarterly sales surpassed $100 million for the first time.

The Baltimore maker of athletic apparel raised its income forecast for the year and said that next year it expects to beat its long-term growth target of 20 percent to 25 percent.

"Under Armour is a growth company," said Kevin A. Plank, chief executive officer, in opening remarks to analysts yesterday. "That is the first and last thing you will hear me say today."

Still, the company's shares were whipsawed in trading yesterday, with traders at first sending the shares down sharply after the report was released. Then the shares soared more than $3 to a 52-week high before settling back down to close at $46.35, a decline of 39 cents from the previous close.

Analysts attribute the volatility - which isn't unusual for Under Armour shares - to mild disappointment over the earnings forecast and the premium investors are paying for the stock.

Under Armour shares are trading at more than 50 times earnings, a level that suggests shareholders expect a sizable upside to future growth.

"We didn't exactly get that either from the quarter or from their guidance," said Eric B. Tracy, an analyst with BB&T Capital in Vienna, Va. The firm is a market-maker for Under Armour shares.

Net income climbed 90 percent to $16 million, or 32 cents per diluted share, compared with $8.4 million, or 20 cents per share, for the third quarter last year. The average forecast of analysts was for 25 cents per share.

Tracy and other analysts noted that 5 cents of the company's earnings per share resulted from a new state tax benefit, which added $2.3 million to net income.

Third-quarter sales grew 48 percent to $127.7 million. The gains came largely from the company's line of training and compression wear, which are designed to wick sweat away from the body and have gained cult status among some athletes.

Under Armour raised its outlook for full-year net income to $38.5 million to $39.5 million, up from its second-quarter forecast of $34 million to $35 million. The revenue forecast was raised to $410 million to $420 million for the full year, versus the previous estimate of $400 million to $410 million.

The company said it boosted its gross profit margin by about 2 percent over the previous quarter to nearly 51 percent. Gross margins are defined as sales minus costs, expressed as a percentage of sales. Declining margins can be a sign that competitors are making inroads, raising the prospect of lower earnings in the future.

Analysts had expressed concern about a roughly 2 percent decline in profit margin in the second quarter, temporarily sending Under Armour shares sharply lower in July.

The decline was attributed to the launch of Under Armour football cleats, a product with lower margins than apparel but one the company had maintained was critical to its goal of being a complete outfitter that could compete with Nike, Reebok and Adidas.

Plank said the company has gained a solid foothold in the athletic footwear market. The company signed a $50 million, six-year deal with the National Football League in August to outfit its players with cleats, and in four months has captured about 20 percent of that market, Plank said. It plans to introduce a similar version for baseball in time for spring training.

One of the company's hallmarks is getting consumers to turn against traditional cotton sportswear and pay premium prices for the Under Armour brand. Plank said retailers continue to replace discounted $20 cotton sweat shirts with $50 or higher Under Armour fleece.

The company is hoping to make similar inroads in Europe, where it is seeing sales grow in the United Kingdom, France and Germany, he said.

"We couldn't be more bullish on the brand," said Tracy, the BB&T analyst.


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