UA Nailed The Q, But Don't Chase It

Takeaway: In line with our view that UA would beat bc of revs and gross margins. But we definitely would not chase it here.

UA's beat was in line with our comments from earlier this week that revenue trends were looking strong, and the favorable spread between sell-in and sell-though on top of a lean inventory base headed into the quarter suggested a favorable gross margin set-up (see comments below). Lo and behold, UA came out and beat on revenue and printed its biggest gross margin improvement in three years. Simply put, UA continues to achieve its growth goals with impressive consistency. We've got to give credit where it's due.


Despite the solid numbers, there were a few things that bugged us.

1) Inventories were high -- +29% vs revenue growth of 23%. This reverses the positive sales/inventory trend we've seen for the past three quarters. Granted, it is consistent with the company's guidance that inventories would build to ensure that they have sufficient product headed into back-to-school and Holiday. But the dynamic is notable.

2) With all the talk about International opportunity on the conference call, you'd think that UA was knocking the cover off the ball outside the US. Yes, sales were respectable at 22%, but it grew modestly below the rate of the US business. UA made it clear that 2014 would be the year for Int'l to really accelerate. But the reality is that UA's Int'l success is kind of like Bigfoot -- lots of hype, but we have yet to actually see it.

3) Footwear surprised us on the downside. While 21% growth is respectable, we think it should be at least 2x that rate for a company with UA's growth runway. On one hand, we like that it is being very deliberate and cautious with the launch of Speedform -- and not flooding the market with product. But we balance that with the simple fact that UA has 1% share of an industry that is absolutely begging for someone to step up and become a viable alternative to Nike.


When all is said and done, we like the TAIL call on UA -- as there are not many companies that we think can grow top line in excess of 20% for 5+ years. On the flip side, this is absolutely not a margin story. What you get in top line is what you get in EPS growth. That's all, and  nothing else. That's not half bad given that the company can feasably triple in size.  But there are other names like RH, FNP, (and to a lesser extent) WWW that have similar Blue Sky opportunity but with significant margin and return upside as a kicker. We can justify the higher multiples with those stories more easily than with UA. We'd prefer to step in and buy UA when there's more controversy on the name, or  when the company is hitting a near-term speed bump in one of its new business initiatives. That's certainly not what we have today.


UA Nailed The Q, But Don't Chase It - uafinstat






Takeaway: Expectations aren't low into UA's print, but based on trends we're seeing, they shouldn't be. If we were forced to bet, it'd be positive.


CONCLUSION: UnderArmour footwear and apparel trends look solid headed into Thursday's print, especially in comparing wholesale sell-in versus retail sell-through. Retail inventory implications are bullish, and combined with a positive sales/inventory spread trend at UA, it's left with a particularly positive Gross Margin set-up. That's a big plus, because at 35x EPS it needs to beat, and expectations aren't low. If we had to make a bet one way or another (which we don't), we'd come out with an upwards bias.



We think that UA's trends look quite positive headed into its print on Thursday.  Our analysis shows that a) sell-through of apparel continues to outstrip sell-in, b) footwear is doing so at even a greater rate (and the Speedform launch is gaining traction), and c) the Gross Margin set-up is bullish given easing product costs and a favorable sales/inventory spread.  All that said, we think that these trends are necessary to materially beat consensus estimates (a beat is critical for a 35x p/e growth stock). The good news is that our sentiment monitor suggests that this name remains extremely hated, which is a bullish stock setup.


One of the few risks we'd point to is if UA comes out and takes up SG&A requirements to grow the business as initiatives into Footwear and International markets become more important. This had been a concern of ours for a while, but after the company's analyst meeting last month we threw in the towel and altered our view (and our model) such that it could attain 20% top line growth without having to take the margin levels of the company sub-10%.  But if it nudges up spending rates again after just having the investment community in Baltimore to sell its strategy -- then there are going to be credibility issues. We'd be surprised if this turns out to be the case.


So when we put it all together, we think that this is one of times where the consensus has it about right,  but if we had to make a bet one way or another (which we don't), we'd have an upward bias. 



UA Nailed The Q, But Don't Chase It - ua app sellin

Source: SportscanINFO and Hedgeye



UA Nailed The Q, But Don't Chase It - fwsellin

Source: NPD and Hedgeye



UA Nailed The Q, But Don't Chase It - uafast

Source: UnderArmour



UA Nailed The Q, But Don't Chase It - uagmsis

Source: Company Reports and Hedgeye



UA Nailed The Q, But Don't Chase It - uasentiment

Source: Hedgeye

LO – Strong Newport Performance and E-Cig Excitement

Lorillard saw strong share and pricing gains and big volume improvement over the industry in its Q2 results.  Total domestic volume decreased -1.7% compared to the prior-year quarter, versus a -6.1% decline for the industry, and versus -6.0% for RAI, on the back of strong performance from Newport, with a volume decline of -1%.


With 74% share of the full-flavor menthol market, Newport continues to be its profit center, however there was much excitement about its electronic cigarette (e-cig) Blu as it increases distribution (more below).


The company gave very little FY guidance beyond similar performance to Q2. Below we present our quantitative levels for the stock and think that the recent pullback based on the FDA’s announcement on menthols (more below) is overdone, at least over the next 60 day period of public comment. If LO can close above its TRADE line of $44.84, we think there is immediate term upside in the range of $47-48.


LO – Strong Newport Performance and E-Cig Excitement - VV. LO



On the FDA and Menthol: questions on the call centered around the FDA’s announcement on Tuesday on menthol cigarettes. Given that LO has 80% of its portfolio in menthol (versus  ~ 30% for RAI and ~18 for MO), LO was quick to acknowledge that its stance is broadly in line with the FDA, namely that if one looks at the body of science on menthol versus non-menthol cigarettes, there is not enough data to conclude that there’s a disproportional health effect from menthol versus non-menthol . LO also agrees with the FDA’s conclusion that it needs more data to make this determination. As it stands, there is a 60 day public comment period, and neither the FDA nor LO have any indication on a time-table for future releases or announcements from the FDA on the issue, but LO expects the process to be massive.



On E-cigs:  e-cigs were a hot topic on the call (similar to RAI yesterday).  LO acquired its e-cig brand Blu Ecigs in April 2002 for $135MM.  LO reported that Blu achieved net sales of $57MM in the quarter with over a 40% retail market share. In the quarter it added its e-cigs to30K retailers to bring its total to 110K retailers.


LO said Blu’s topline grew year-over-year, but was flat sequentially due to the rollout of its new rechargeable kit. LO only sold rechargeable Blu units in 2 of the 3 months of the quarter as it took one month to draw-down inventory of its old model before the June 24th launch of its new model to replace the older version.


LO, unlike RAI or PM, was very bullish in its commentary on repeat purchases of its e-cig, and confident that although the new rechargeable kit is sold at break-even for the company, the razor-razor blade model of the kit-cartridge will prove profitable.  As of Q1 2013 (no update on the call), disposables accounted for 51% of its e-cig sales. Clearly the company will be pushing to expand its more profitable rechargeable business at the expense of less profitable disposables, and we think the new rechargeable is a catalyst for this shift, and should be margin enhancing as distribution and investment behind the brand expand.


Feedback according to CEO Murray Kessler on e-cigs from retailers is very positive given the opportunity for higher margins versus other tobacco offerings.  On who is switching to e-cigs, Kessler offered up its typically users of less tar cigarettes. He added, this is another reason why he expects less cannibalization with its full-flavored menthols or even its new Newport non-menthol Golds.  



What we liked:

  • In the quarter, net sales increased 4.2% over last year to $1.804 billion. EPS grew 15.3% to $0.83
  • Volume outperformance of -1.7% versus industry at -6.1%
  • Total Lorillard retail market share of cigarettes increased 0.6 share points to 14.9% driven by Newport menthol, even as the menthol category becomes increasingly more competitive
  • Domestic retail share of the menthol market reached 40.2%, an increase of 0.9 share points versus the prior-year quarter
  • Cigarette net sales increased $24 million, or 1.4%, to $1.747 billion
  • The increase in cigarette net sales resulted primarily from higher average net cigarette selling prices, partially offset by lower cigarette unit sales volume
  • Blu Ecigs achieved net sales of $57MM and over a 40% retail market share


Matthew Hedrick

Senior Analyst


In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance




  • IN-LINE:  As seen by our recent pricing surveys, weaker Caribbean market and aggressive pricing is being offset by a steadily improving Europe market for Royal Caribbean. FY 2013 guidance remains relatively unchanged.  Caribbean pressures should not be any comfort, particularly to Carnival. 

RCL 2Q 2013 REPORT CARD - 111




  • BETTER:  2Q onboard yields were up a whopping 8.2%.  Gaming, beverage, specialty restaurants, shore excursions all outperformed.
  • PREVIOUSLY:  "We saw improvement in all categories for onboard revenue. Ships that have been recently revitalized and vessels sailing on new itineraries did particularly well."


  • WORSE:  Mgmt reduced Caribbean expectations for the rest of FY 2013 as pricing competition has picked up recently
  • PREVIOUSLY:  "Over the last few weeks though, we have seen an improvement in booking activity and we are still forecasting record yields for the Caribbean."


  • SAME:  Booking window has been expanding  
  • PREVIOUSLY:  "On average, our guests are booking their cruise about two weeks earlier this year than they were in 2011 and 2012. In fact, the booking curve has looked strikingly similar to 2008 for the last several months."


  • BETTER:  Mid single-digits ticket yield growth is above expectations.  Mgmt is more comfortable with the outlook on Europe and is optimistic on this market in 2014.  
  • PREVIOUSLY:  "We considered our European summer revenue projections to have more risks attached to them in comparison to other spheres of deployment. Although there is still somewhat limited visibility for all of our summer deployment, at this juncture, in Europe, we are sufficiently ahead of 2012 on both rate and occupancy, to be comfortable that our European deployment is of comparable risk to our other programs."


  • SAME:  one of the drivers which lowered yield expectations for the year.  The terriotory disputes have resulted in 30 modified sailings and increased bookings volatility.  China is 3% deployment for 2013.
  • PREVIOUSLY:  "Turning to China, the region that represents 5% of our capacity in 2013. The hostility between Japan and China surrounding the disputed islands in the East China Sea continues to affect our itineraries and our demand generation. We have now removed the Japanese ports of call from nearly all of 2013's North Asia program. As a result, most itineraries from our China homeport of Shanghai and Tianjin are calling only on ports of call on South Korea."


  • SAME:  Increased capacity continues to pressure yields in this market
  • PREVIOUSLY:  "In the near-term is flat to slightly lower yield outlook for us for this year. we would expect that Australia, as a southern summer market, would continue to grow and be a mainstay of the cruise industry going forward."


  • SAME:  Has been lagging its competitiors.  RCL recently opened a new head office in Latin America.
  • PREVIOUSLY:  "Pullmantur's performance is inevitably affected by that [Spain] very strongly and that's been a big disappointment and I don't see any quick turn away from massive improvement given the economic situation."

Early Look

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Initial Claims: Good, But Less Good

Takeaway: The rate of improvement in the labor market slowed notably this past week, but we're not going to get excited by one week of data.

This past week, rolling Non Seasonally Adjusted (NSA) initial claims were 8.8% lower than the prior year. This marks a decelerating rate of improvement vs the prior week, when rolling NSA claims were better by 10.6%. On a single week basis, NSA claims were 0.8% lower than the previous year, a sharp deceleration vs the prior nine prints of: -9.9%, -13.3%, -9.4%, -9.2%, -7.7%, -11.7%, -9.4%, -7.6% and -8.0%. 


Initial Claims: Good, But Less Good - roll


A possible explanation is that we're eclipsing the auto plant closings, which create significant NSA volatility. Recall that this year, due to heavy demand, there were far fewer auto plant shutdowns than in the corresponding periods last year. That said, the auto dynamic is a two-week phenomenon, so it wouldn't explain the deviation from the trend we've been seeing the last nine weeks.


Bear in mind that in less than six weeks, we'll shift out of the seasonally-adjusted data headwind period into the data tailwind period, which will last six months from September through February, 2014.


The Data

Prior to revision, initial jobless claims rose 9,000 to 343,000 from 334,000 week-over-week, as the prior week's number was revised up by 2,000 to 336,000.


The headline (unrevised) number shows claims were higher by 7,000 week-over-week. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -1.25K week-over-week to 345.25K.


The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.8% lower year-over-year, which is a sequential deterioration versus the previous week's year-over-year change of -10.6%


Initial Claims: Good, But Less Good - roll2


Nothing unexpected - Caribbean worse, Europe better, FY guidance roughly unchanged despite weak 3Q yield forecast. Mgmt avoided elaborating on weak Caribbean pricing and rather focused too much on China/Japan.



"While the operating environment has been frustrating, our bookings trajectory is looking good and I'm thrilled to see our cost initiatives beginning to pay off. Exploiting this positive momentum will help us take our returns and our profitability to the next level."


- Richard D. Fain, chairman and chief executive officer



  • 2Q exceeded expectations; full-year 2013 guidance looking better
  • In recent weeks, competitive pricing has gotten more intense
  • Further cost controls initiative in 2014
  • 'Feels good to come to a inflection point both on revenues and expenses'
  • 2014 load factor and pricing higher YoY
  • Pullmantur new head office in Latin America
  • Cost initiatives will be on the overhead component
  • Want to achieve flat NCC ex fuel in 2014
  • 2012-2016 capacity growth will be 4% assuming no dispositions
  • Oasis and Allure of the Seas - most energy efficient ships in the world; their energy consumption is 25% better than rest of fleet; Quantum will be even more energy efficient
  • Better on board spending revs in 2Q increased 8.2% - gaming, beverage, specialty restaurants, shore excursions all performed 
  • Affinity-card accounting error in redemption of reward points:  allows cardholders to have reward points; 
  • 2nd half of year guidance:  Aggregate bookings and pricing are higher YoY. Europe doing as expected.  Pullmantur is the one lagging brand.
  • China/Japan territory dispute:  modified 30 sailings. Have increased bookings volatility.  China is 3% deployment for 2013.
  • Caribbean capacity: 25% in Q3 and 50% in Q4
  • Caribbean has been affected modestly but holding up well
  • Early patterns of 2014 are encouraging:  booked load factors are higher with slightly higher per diem
  • There will be more one-time costs in 2013
  • Retired $550 mm bond 
  • Will reduce net debt balance by $270MM in 2013
  • Grandeur of the Seas returned on July 12
  • Celebrity:  over past few months they have increased their marketing programs; good progress in cost management
  • 6 vessels left to be revitalized
  • Have refreshed slots on floor casinos

Q & A

  • Promotional environment:  overall, pretty consistent.  Has not seen acceleration in last two weeks. 
  • Europe:  largest capacity decreases are in the Med
  • Affinity's 7 cents adjustment is for past several years
  • More competitive pricing in the market, overall, not necessarily just the Caribbean
  • Mgmt refused to elaborate on North America pricing
  • Europe today vs 2008:  high single digits lower than that in 2008
  • Feel good about 1Q 2014; 2014 generally is looking good, particularly Europe
  • Capital Hill:  consumer protection dialogue yesterday; Rockefeller's proposal to close tax loophole is very preliminary

  • Had pared down Alaska expectations in April
  • Quite comfortable with resolving upcoming debt maturities - partially refinance, partially pay down
  • Australia:  capacity increases have pressured yields; market is in-line with mgmt expectations
  • Booking windows have been expanding
  • Caribbean pricing pressures - seeing changes 'on the margin', particularly in the fall (Q4)
  • Long-term capacity growth forecast - low to mid-single digits
  • Quantum bookings enthusiasm higher than when they revealed Oasis

Morning Reads on Our Radar Screen

Takeaway: A quick look at stories on Hedgeye's radar screen.

Keith McCullough – CEO

SAC Capital Indicted in Six-Year U.S. Insider Probe (via Bloomberg)

Trader and S.E.C. Lawyer Spar Over E-Mail (via DealB%k)

Housing Markets Where Cash Is King (via CNNMoney)

Missing red diary at heart of Italy's dark history (via Reuters)

Denmark Rejects S&P Warning to Tighten Rules for Covered Bonds (via Bloomberg)


Morning Reads on Our Radar Screen - co9


Daryl Jones – Macro

Copy of SAC Indictment (via Scribd.)


Josh Steiner – Financials

Hedge funds most bearish on treasurys in 16 months (via CNBC)

U.S. Jobless Claims Rose Last Week by 7,000 to 343,000 (via Bloomberg)


Tom Tobin – Healthcare

The entire #ACA premium picture, not just the Obama Administration's (via Twitter)


Matt Hedrick – Macro

Lululemon Courts Wall Street Jocks to Broaden Yoga Image (via Bloomberg)


Brian McGough – Retail

Under Armour Second-Quarter Net More Than Doubles on Higher Sales (via WSJ)


Jay Van Sciver – Industrials

United Continental profit rises, aided by lower costs (via Reuters)