Beat and guide down. Familiar story… There are puts and takes to this Q for UA, but there’s no doubt in my mind that they net out to be a positive result. Here’s the simple overview…
1) Revs +24% -- 400bp better than I expected (which was about in line w the Street). Footwear appears to be the biggest driver, which is not a shocker. Kids posted a sharp deceleration on both a 1 and 2-year basis, which the company will need to explain on the call. Not huge to the P&L, but bit signal of brand relevance.
2) Gross Margin +41bp. I’m very impressed that UA pulled this off. I had the GM improvement a full quarter out in model once inventory was completely cleared. But with sales +24% and inventory only +8%, the GM math is less of a surprise.
3) SG&A: A highly discretionary line for this company on a Q to Q basis. UA guided to 11.5% and came in at 10.7%, which is a $2mm delta, or about $0.03-$0.04 per share. While I’ll want color on this (perhaps just due to revenue beat/pull forward), nothing about the trend on a standalone basis concerns me.
4) Cash Cycle: 19 day improvement in inventories, 3 day reduction in DSOs, but giving back 18 days in lower payables?? This is likely driven by footwear, where factories are more consolidated and terms are tighter than in dealing with the fragmented apparel factories (i.e. there are about 30 factory groups worldwide that make footwear, but about 20,000 apparel groups).
5) Visibility? Over each of the last two quarters, the company has guided to a very tight FY operating profit target ($103.5M-$104.5M in Q2 to $104.5M-$105.5M in Q3). The outlook for the remainder of 2008 guides to a much wider range of $97.5M-$104.5 implying more uncertainty over Q4 profitability.
Netting it all out, with all the negativity on the name heading into the quarter, I’ve gotta think that the stock rips on a result like this in conjunction with a big market day. It should. UA remains in my top 5.