• It's Here!

    Etf Pro

    Get the big financial market moves right, bullish or bearish with Hedgeye’s ETF Pro.

Is it me, or is UA’s guidance starting to look very Nike-esque? That’s not a bad thing, by the way. This was a solid quarter all around, right in line with what we were looking for. What we were not expecting is for the company to raise EPS guidance – even slightly. There were definitely puts and takes – as there always are. But sales UP 24% with inventories DOWN 19%? Man, if that does not set the stage for a positive gross margin setup as 2010 progresses, then I don’t know what does. They guided to ‘no SG&A leverage’ which is typical Nike behavior when it wants to keep numbers at bay. Lastly, they continue to play down footwear in 2010 as Gene McCarthy builds up his organization and product flow throughout the year for a larger launch in 2011. Does he do himself ANY justice setting unbeatable targets with Kevin Plank and shareholders in his first nine months on the job? I think not.  

The bottom line here is that we sold UA from our portfolio in advance of the quarter. But that was purely based on near-term overbought factors. If numbers shake out over the next day or two to be in line with guidance ($1.02-$1.04), then this name goes right back up there on my list of favorite names. They’ll earn $1.15 or better.

Quarterly Highlights

  • EPS: $0.30 vs. street $0.25, guidance $0.22-$0.24
  • Raised outlook to the higher side of previous guidance: 10% - 12% revenue and EPS growth
  • Apparel wholesale and consumer direct were the leading growth drivers of Q4 and will be for 2010
  • Positioning footwear to not contribute to growth in 2010, basketball shoe launch in 2011
  • Suggesting Gross Margins will grow every quarter in 2010 while SG&A will grow faster than sales for the balance of 2010

P&L Notables

  • Revenue growth was 24% for 4Q, a sequential improvement on 1yr but a significant slowdown on the 2yr (lowest runrate in history of company).  2 year fell to 13% vs. the high teens low 20s average of 2009.  Sales compares are difficult in Q1 10, Q3 10, and Q4 10, but are easy in Q2 10.  Guidance of 10% - 12% growth 2010.

 

  • Apparel: Q4 posted 26% growth, a large sequential increase, but a 20 bps slowdown on the 2yr.  Looking forward Q1 10 and Q3 10 have easy compares, Q2 10 is a slightly more difficult compare. 

 

  • Footwear: Q4 posted -5%, a large sequential decline on the 1yr and 2yr trends.  Footwear fell as a % of sales from 5.1% of Q4 08 to 3.9% of Q4 09.  Footwear is 16% of the company in 2009 vs. 12% in 2008.  Looking forward Q1 10 and Q3 10 face very difficult compares of +100% growth. Running launch began in the last weeks of March in 2009 so Q1 10 compare will be most difficult. 

 

  • Accessories: grew 24% in Q4, a sequential increase on the 1yr but a slow down on the 2yr.  Looking forward compares are very easy in Q1 and Q2 2010 while the 2H 10 have difficult 20%+ compares. 

 

  • License: Q4 revenue grew 18%, and acceleration in growth on the 1yr and massive acceleration on the 2yr.  Looking forward Q1 10 has an easy compare and then compares are difficult going forward. 
  • Gross Margin: Q4 grew 64bps which was a nice sequential 1yr and 2yr improvement.  Compares are easy from Q1 through Q3 of 2010 with Q1 10 and Q3 10 being the easiest.
    • Strong revenue growth in higher margin channel of direct to consumer and shift in mix towards more apparel which has higher margins grew margins for Q4.
  • SG&A: grew 28.1% in Q4 09 which was in line with the 2 year trends of previous quarters.  SG&A margin grew 128 bps which was a sequential decline on the 1 year trend, but a sequential increase  on the 2yr.  Marking expenses were slightly lower than we expected them to be at 10.8% sales.  Looking forward SG&A margin has difficult compares in 1H 10 with Q1 10 being the most difficult compare. 
    • SG&A growth driven by continued expansion of factory house stores and higher personnel costs
  • Operating Margin declined 64 bps in Q4 to 12.1%, marked a 2 year decline of 202bps which was a large sequential decline from Q3 09. 

Balance Sheet and Cash Flow Items

  • Inventory at quarter end decreased 19%
  • Total cash and cash equivalents increasing over $85 million year-over-year to $187 million at year end.
  • No borrowings outstanding on the $200 million credit facility.
  • Net accounts receivable decreased 2% on a year-over-year basis as a result of conservative approach to credit terms during 2009, strong efforts from collections team, and direct to consumer business was a higher percentage of overall business.
  • Enhanced and expanded currency hedging strategy significantly reduced our Exposure to foreign currency fluctuations during the fourth quarter and the full year
  • Cap Ex was $25 million compared with $41 million in 2008. Previous outlook was for 2009 CapEx to be in the range of $30 million to $35 million.  

Additional Callouts  

  • The largest percentage of distribution growth in 2010 will come from existing wholesale partners through a combination of new doors and increased dedicated space within existing doors.
  • Added depth to the women's team across all functions working on bringing the right fit, the right colors and cohesive merchandising to women's line in 2010.
    • Expansion of women's business: goal is to rival their men's business, have momentum in women's apparel and expect it to continue in 2010, increased understanding of the female athlete, development of the Under Armour fit, the evolution of merchandise flow, and the support of retail partners will help gain floor space
  • Direct consumer business was a key driver of 2009 growth and will be a key element of our 2010 distribution expansion strategy. 53% growth in direct to consumer in Q4.
    • The second piece of UA’s distribution expansion is direct to consumer, continue to expand brand's access to new customers, direct to consumer allows UA to control and influence the presentation at retail. Factory house outlet stores have been a great inventory management tool
    • Goal to open 15 new stores to bring outlet stores from 35 in 2009 to 50 in 2010.
  • Need to invest capital, both human and financial to fully leverage the Under Armour opportunity in footwear. UA is not reliant on footwear to grow the topline in 2010.  Taking a more conservative approach to footwear revenue. 3 goals for the footwear business in 2010:
    • Strengthen existing categories, particularly cleats. UA expects to take market share in both football and baseball cleats in 2010 and beyond. Plans for double digit growth in cleats
    • Repositioning training and running categories with better organization to develop product that will drive multibillion dollar global brand
    • Developing new footwear categories that will begin to impact our business in 2011 and beyond. No major footwear launch planned for 2010. But developing basketball footwear and positioning for a future launch. Under Armour basketball footwear will not be for sale at retail, it is being tested and authenticated throughout 2010 on the feet of 10 division 1 basketball programs, more than 20 top high school programs, and NBA rookie of the year contender Brandon Jennings.
  • In July UA will be outfitting Boston college's athletic program.
  • UA is the official sponsor of the NFL Combine held in Indianapolis at the end of next month, outfitting every player head to toe in Under Armour and we will be telling our brand story during the NFL draft in April which this year will be held in prime time
  • Teaming up with ING performance to host Athlete Combines at regional sites across the country: host 50+ Combines touching thousands of young athletes showcasing the Under Armour brand as well as new products in categories from footwear.
  • Developing a comprehensive athletic training platform that will establish a global measurement standards for improved sports performance, health, and fitness called Combine 360. Hope Combine 360 will be as universal for athletic performance as the SAT score is for academics.
  • Will use these grass root platforms to launch key products for the brand like the upcoming Under Armour Core Short (a patented compression short with an iconic X type design that stretches across the body which stabilizes and supports muscles and core) and will be available at retail beginning this spring.
  • UA is the official uniform supplier for the US bob sled team and the free style ski team (including UA athlete Lindsay Vaugh)

Outlook

  • Raised the low end of previous outlook and anticipate 2010 annual net revenues in the range of $145 million to $160 million, an increase of 10% - 12% in 2009.
  • 2010 EPS to grow in line with net revenue growth, $1.02 - $1.04
  • Expect topline growth in 2010 to be fueled by continued strength in direct to consumer as well as higher growth in our US wholesale apparel channels.
  • Planning footwear revenues to be down in 2010 with the most significant dollar impact occurring in the first and third quarters. Focus for footwear to continue to excel in the cleated categories while taking a conservative approach to the running and training categories to better position for new product in 2011.
  • Gross margins are planned to improve in all four quarters of 2010 over 2009 from partnerships in apparel and continued growth in higher margin sales and direct to consumer
  • Operating Expenses expected to exceed topline growth in 2010
    • invest in marketing in the range of 12% to 13% of net revenues, marketing may be a little more skewed towards the 2H because of easy 1H compares with running launch
    • will continue to invest in direct to consumer particularly around factory house and global direct online
    • product innovation supply chain team build out  and continue innovative design and
    • will increase investments in information technology around analytical tools to support long term growth
  • Effective tax rate in 2010 to improve approximately 50 basis points from the 2009 rate to 42.7% 43
  • Fully diluted weighted average shares outstanding of approximately 51.1 million to 51.3 million for 2010.
  • Cap Ex for 2010 expected to be in the range of $35 million to $40 million.

Q&A

  • Channel Growth: Gaps in distribution present opportunities for growth.  Direct to consumer will fill the remaining gaps.  Example of UA uniquely filling some gaps can be seen in the Pacific Northwest where many bankruptcies have occurred (Joe’s Sporting Goods). Partnering with Fred Meyers to in the Pacific Northwest only (not a broad national opportunity).  Still great opportunity to reach athletes in malls and will continue to work on that in 2010. No plans to open additional full price stores but can see a time in which full price specialty rollout will help add yet another lever to solve the distribution gaps
  • European distribution: UA is proud of European achievement so far.  Working hard in Europe and Asia to achieve brand equity with athletes on the field.
  • Footwear Focus: Remain absolutely committed to footwear, see momentum, repositioning footwear to make sure they are spending time.  2010 is about being excellent in categories where UA already has existing strength. Big coming out party for UA in 2011. Not going to see a drastically different presentation of footwear at retail in 2010. Going to be taking a fresh look at training and really bolster that category and the same thing in running
  • Outlet product offerings and return on investment: Different product in outlet channel vs wholesale, but the outlets will still have top notch product. Direct to consumer in total is one of UA’s best return on invested capital models  with factory house as a very strong return on invested capital. Factory house has higher gross margins on the overall business but also have increased selling, general and administrative expenses to run those stores. Overall outlets are a positive for operating margins
  • Product, Channel, and Category Growth:
    • Future bookings see strong growth in apparel business through new products, additional doors, and additional floor space. 
    • Partners are in a very healthy inventory position. Men’s, women’s, and kids are all growing well and will grow substantially throughout the year. 
    • Women’s will continue to lead the pack for growth followed by youth and men’s.
    • Expanded apparel from compression to fitted, semi fitted, loose fit.  Understanding compression gives UA the capability to develop great loose fitting products as well. People are smarter about layering and it’s a new phenomenon, people don’t just go out with a big coat, they are smarter about their clothing choice and they demand better apparel products.
  • Gross Margins: direct to consumer was  a big upside, 70bps of upside in Q4.  Footwear is lower margins in 2009, but will be a benefit in 2010.  Management guided to grow gross margins every quarter.
  • Inventory Strategies: move forward with the inventory efficiency but also keep a very, very close eye on fill rate. In certain categories in 2009 demand outpaced UA’s ability to supply. Some of that is around the cold weather product and some around some training product. But going forward in 2010, UA will be a little bit smarter about how they take positions in raw materials and positions in finished goods. Gearing up to improve fill rate and will be a big plus in 2010
  • Olympics is the first chance to show UA as a global story: Taking advantage of relationships with a couple of different teams. 2010 is a little premature as a lot of the deals are done 3-5 years in advance. Formed a relationship with US ski awhile back. The number one curling team in the world is the Canadian team and probably will be outfitted in Under Armour in the upcoming Olympics. Focused on what 2012 is going to mean for UA and focused on what the future is. Goal is to the protect their 94% domestic of business while  continuing to plant seeds internationally. Currently doing business in more than 40 different countries today

UA: Guidance is Too Low - UA S 1 10