Despite healthy first-quarter earnings, Under Armour stock plummeted about 9 percent yesterday as the company gave second-quarter earnings estimates that were well below analysts' expectations.
The Baltimore sports apparel company said it expects to earn 2 to 3 cents per share in the second quarter. Analysts predicted an average of 7 cents per share, according to Bloomberg.
The company, which makes apparel that wicks sweat from the body, is spending more money on marketing to launch a sequel to its popular "click clack" advertising campaign. It will also incur costs for putting its logo on the outfield wall of Wrigley Field in Chicago.
Kevin A. Plank, Under Armour's chief executive officer and chairman, said in a phone interview yesterday that the company is still on track to meet its year-end guidance.
Net revenue for 2007 is expected to be $560 million to $580 million, or 30 percent to 35 percent over last year. Income from operations for the year is expected to reach $74.5 million to $77.5 million, also 30 percent to 35 percent over last year.
"It's just a matter of a shift," Plank said. "We're anticipating a large spend, a large marketing initiative."
The divergence between Plank's view that expanding product lines and increasing ad spending is vital to building Under Armour's brand and Wall Street's concerns that such expenses hurt profit margins has been a recurring theme at earnings time since the company went public in 2005.
Some analysts said yesterday's stock pullback was justified given the high expectations for the company. The stock fell $4.44, or 8.79 percent, to close at $46.06.
"Anytime the quarterly guidance comes in below where the Street is looking, there is a little bit of concern," said Eric B. Tracy, a senior research analyst with BB&T Capital Markets. "They explained that away by saying it re-accelerates to the back half and giving as evidence the reiteration of their full year guidance."
"We're OK with it as long as the execution continues out and they do in fact hit those thresholds," Tracy said. BB&T expects to receive compensation for investment banking services from Under Armour in the next three months. The company has a "hold" on the stock.
Kate McShane, an analyst with Citigroup Investors, said in a report that she expected to see "short-term weakness" after yesterday's announcement but that she thought the shares were still fully valued.
Under Armour's first-quarter earnings increased 13.8 percent, helped by an expansion of its baseball and golf lines. It also benefited from a rise in apparel prices. The average price rose 8 percent, or 11 percent when counting footwear sales.
Plank also said yesterday that the company plans to open its first full-concept retail store in Maryland later this year. It currently only operates outlet stores. Plank did not disclose the store's location but said that it would be 4,000 to 5,000 square feet and that he expects it to be profitable in the first year.
The company eventually wants to put stores in areas where its products are not widely available at major retailers.
Tracy said if Under Armour picks the right real estate, retail stores can serve as a strong distribution channel.
"It certainly can work in terms of providing another channel of distribution and one that they can control the merchandising and display the full breadth of their product," Tracy said. "It can also spur growth in other distribution channels."
The company reported first-quarter net income of $9.9 million or 20 cents per share, compared with $8.7 million, or 18 cents per share, for the quarter last year. Net revenue increased 41.8 percent to $124 million.
Under Armour plans to launch a line of noncleated footwear in 2008 and an outerwear line later this year. It expects footwear to eventually outsell its apparel line.
The company also is aggressively expanding in Europe.