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Very solid quarter all around for Under Armour. 20%-22% organic growth in sales, EBIT and EPS is nothing to shake a stick at – especially when lesser consumer discretionary names without a real growth platform and risk management process are struggling to stay afloat. That said, this was not the result that a $47 stock needed. We’re taking down our 2011 EPS estimate by $0.14 to $1.56. This is likely still at the high end of where consensus will shake out. But one of the factors that kept us bulled up on this name when it was at $35 is that the Street was at $1.10 for 2011 vs. our $1.70. That gap is officially gone.

Our downward revisions are two-fold.

1)      Cotton Risk: The one factor that UA has been largely immune to – exposure to cotton – is now a risk. “Cotton is the Enemy” is the old tagline. Now there’s a big cotton-based campaign starting in 2011. Not for a minute do we question the salability of the product. UA will brand it and sell it better than almost anyone else could. But they’ve simply never had to have a meaningful process around buying and hedging cotton. This idea was on the drawing board – including researching ideal consumer price point triggers – when cotton was around $0.80/lb. Now it’s at $1.27. That's a painful change.

2)      Inventory Risk: Under Armour had a gnarly turn in the triangulation of its sales/inventory spread vs. EBIT margin in the latest quarter, and the company mentioned on the call that the spread will erode further in 4Q. High multiple stocks simply don’t go up when this happens. It’s no accident that UA’s massive tear occurred during the six quarters it had a positive spread.

UA: The Gap is Gone - UA S 10 10

There are many more details about the quarter – and most are quite positive. But those are consistent with our thoughts all along. This remains a world class brand, a great company, and (at a price) a great stock (those three things need to be evaluated separately). But we would not look at getting back involved here without a meaningful pullback.


Our Notes From The Conf Call

Clean beat $0.63 vs. $0.60 with both revenues and gross margins slightly lighter than expected with expectations more muted near-term on the margin. Full year guidance increased as expected, suggesting the additional (incremental) $20mm we expected in the Q3 pushed to Q4 and margin degradation in Q4 vs. our prior expectation and implies EPS of $0.34-$0.35 below the Street at $0.36 placing greater importance on ultimate success of basketball launch. Initial commentary on 2011 better than expected and Street estimates calling for revs and EPS up +20%-25% implying $1.48-$1.55 in EPS vs. Street at $1.40.

P&L Notables:

EPS: Beat $0.63 (clean) vs. $0.60E ($0.68 HE)

  • Reported $0.68 ($0.05) from tax benefit
  • ~$0.02 benefit from shift in media costs out to Q4

Sales Growth: +21.9%

    - Apparel: +28% growth across all businesses (mens’, women’s and youth) though lighter than we expected down

      on both 1Yr & 2Yr

  • Men's, women's and youth all growing 25%+
  • $ growth in women's equal to men's this quarter (moving towards growing women's to same size as men's)
  • Opened 5 new factory house stores; total to 50 locations, expect 54 by year end vs. 35 in 2009

    -  Footwear: -20% declined as expected, down 1Yr up on 2Yr basis

  • Expect return to growth in 2011 driven by basketball

     -  Accessories: +19% better than expected (rounding error)

     -  Licensing: +23% better than expected (rounding error)

     -  Direct-to-Consumer: +47%


  • Revs up 60% on strength of Europe and Japan
  • Japan partner to surpass $100mm in 2010 with launch of first non-cleated footwear in Q4

New Product:

  • First performance  cotton t-shirt to be introduced in spring 2011
    • Primary benefit expanding reach of customer base

GM: 50.9%; +150bps due to:

  • primarily due to lower sales returns and other reserves (+60bps)
  • more favorable year-over-year impact of liquidations and inventory reserves (+50bps)
  • higher percentage of revenue from our higher margin Direct-to-Consumer channel (+45bps)

SG&A: 33.7%; +170bps due to:

  • continued expansion of the Factory House stores as well as increased investments in product innovation and supply chain. Marketing expense for the third quarter of 2010 was 10.9% of net revenues compared with 10.5% in the prior year - increased sponsorships and
  • Reflect $2mm shift of media costs to 4Q
  • Expect marketing costs of ~12% in full year at low end of prior guidance (12%-13%)

Tax Rate: received a state tax credit and federal reserve tax credit

  • Expect full-year rate of 39.2%
  • 2011 rate of 40.5%-41%

Balance Sheet: inventories up +28% on +22% sales growth

  • Cash to $134mm; no debt on $200mm facility
  • Inventory up as safety stock increased around core programs + increased 'made for strategy' across factory house store base

CapEx: expect to come in at lower end of $35-$40mm range


Increased guidance as expected, provided incremental view on 2011 (aggressive and above Street expectations):

  • 2010 annual net revenues in the range of $1.030 billion to $1.035 billion, an increase of 20% to 21% over 2009.
  • 2010 diluted EPS in the range of $1.23 to $1.24, an increase of 34% to 35% over 2009.
    • The updated earnings outlook reflects a full year effective tax rate of approximately 39.2%.
  • 2011 Outlook: Based on current visibility, the Company expects both 2011 annual net revenues and 2011 diluted EPS to grow at the higher end of its long-term growth target of 20%-25% implies $1.48-$1.55 in EPS
  • “mportant steps include the evolution of our current ColdGear product, the introduction of our first basketball shoes this past weekend, and leading the market once again with an innovative new apparel launch in early 2011”


Implies: EPS of $0.34-$0.35, Street at $0.36

Revs up 23%-28% ($20mm-$30mm of incremental revs – about same amount short in Q3) an acceleration on both 1Yr and 2YR 

  • SG&A growth approaching 30% in Q4
    • Includes $2mm marketing cost shift from 3Q
  • Tax rate of 40.5% to 41% in 2011
  • Inventories growth to outpace revs in Q4 to increase safety stock and new product for 2011 (i.e. hats, bags, and cotton apparel)
  • GM improvement in Q4 similar to Q3 (~+150bps)
  • Revs to see small benefit from footwear in Q4

Sports Marketing Progress:

  • In keeping with Football heritage, continuing to invest in marketable assets
  • Auburn Tigers #1 in BCS, UA has 5-year deal with the team
  • New NFL endorsements in Boldin and Miles

New Benchmarks (4 areas) as UA embarks on 2011:

  • Product
    • Introduce new market in cotton
    • 5th year making footwear, think overtime footwear could lap apparel business 
    • "challenge is to invest and win outside the cleated business" with focus on growth in running and basketball
  • Story
    • Telling the story globally in UK, Japan, and first steps in China (will become more visible in coming months)
  • Service
    • 30% YTD growth in apparel positive, but not satisfied with servicing customer demand for product
  • Team
    • Will continue to add industry pros to build out the team


Gross Margin Negative Offsets:

  • Had more apparel liquidations yy in Q3 - modest impact
  • Left inventories clean will be an offset in Q4
  • Biggest drivers growth in direct business (margin enhancing) and footwear business (negative impact)
  • Cotton not a significant driver of costs (yet) - smaller as a % of revs - don't expect a negative impact in 2011

SG&A in 2011 given new investments:

  • Targeting modest SG&A leverage in 2011

Basketball Footwear:

  • No shoes shipped in Q3
  • Will take a few years to really start to see market share gains

New Cotton Product:

  • Mostly an allocation program, little bit replenishment on the cotton side
  • From a distribution perspective, no significant changes in 2011 (including cotton product)

Footwear Trends:

  • Have seen good success in outlet channel with footwear
  • Down overall given size of the running launch last year
  • Expect margin profile in 2011 similar to 2010

Reality - Opportunity in Basketball:

  • $1.3Bn market opportunity in US alone
  • Mid-single digit share would get UA to #2 player (target) = ~$60-$75mm annual sales goal

What Mgmt has learned:

  • Emphasis on youth - can't cut out key existing customers from future launches (e.g. running)

What it's doing about it:

  • Taking the time to test and build great product - not rush

Gross Margins in Footwear:

  • Pure leverage on tooling
  • Still see ~1000bps+ opportunity overtime
  • Started off with 1 partner 5-years ago, now working with 5-6 partners

Store Growth Plans:

  • Expect another 4 factory house in 4Q
  • ~20 new FH stores in 2011 more front-end loaded
  • No plans for add'l full price retail
  • Pop-up store in NYC in November

Cost Inflation:

  • Good visibility through spring-summer 2011
  • Less than 10% of apparel manufactured in China
  • Footwear realizing cost pressure

Int'l Opportunities:

  • Gaining momentum with Japanese partner growing from $35mm in 2007 to $100mm+ in 2010
  • Expect to have a shop-in-shop up in China over next several months - approaching that market conservatively
    • First full price store in 2011
  • Typically first 5-years about understanding culture and building team (Europe now at that point)
  • Int'l overall up 60% in qtr and 59% YTD
  • Overtime goal see opportunity to build int'l to 50% of revenue base

Retail Store Performance:

  • Made for strategy around 75%-95% industry average, UA well below that
  • Currently around 2x where they were last year


  • Started footwear business with 1 partner 5-years ago; now working with 6 partners - all in China
  • Recent trip to explore geographical diversification
  • Want to keep concentrated partner base