Under Armour has more than Stephen Curry going for it. Source: Under Armour.
Under Armour Inc (UAA -0.76%) reported fourth-quarter and full-year 2015 earnings on January 28 before trading, turning in yet another period of dynamic growth. There were three things that stood out as keys for the business going forward: two things -- international expansion, and the accelerated growth of footwear sales -- that are driving huge amounts of growth, and one thing -- the company's ability to maintain market share with its retail partners -- that bear watching.
Let's take a closer look at the results, as well as those three key areas of focus.
The numbers
Fourth quarter:
| Metric | Q4 15 | Q4 14 | Change |
|---|---|---|---|
| Revenue | $1,171 | $895 | 30.8% |
| Net income | $106 | $88 | 20.4% |
| EPS | $0.48 | $0.40 | 20% |
| Gross Margin | 48% | 49.9% | -190BPS |
| SG&A (% of rev.) | 32.8% | 33.6% | -240BPS |
| Operating Income | $177.60 | $146.30 | 21.4% |
Source: Company earnings release.
Full-year:
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $3,963 | $3,084 | 28.5% |
| Net income | $232.6 | $208 | 11.8% |
| EPS | $1.05 | $0.95 | 10.5% |
| Gross Margin | 48% | 49.9% | -190BPS |
| SG&A (% of rev.) | 37.8% | 37.5% | -240BPS |
| Operating Income | $408.5 | $354 | 15.4% |
Source: Company earnings release.
Observations about Under Armour's performance
- Last quarter marked the 23rd consecutive quarter of 20%-plus sales growth for the company. That's almost six years.
- Revenue growth continues to outpace both operating and GAAP income growth. This is by design, because of aggressive investment in product development, international expansion, branding, and technology such as Connected Fitness.
- Apparel remains the company's largest segment, at 71% of revenues.
- International revenues were 11% of sales last quarter, a near-doubling from 6% of sales only two years ago.
- Footwear was 17% of sales last quarter, a massive jump from 10% of sales only one year ago.
For context, footwear accounts for about 60% of Nike Inc.'s (NKE 1.55%) total sales, while apparel accounts for less than 40% of revenue. In terms of geographical sales mix, Nike derives slightly less than half of its sales from North America, with the majority coming from the rest of the world.
Under Armour's goal shouldn't necessarily be to have a similar sales mixes as Nike, but it can help demonstrate that it's quite reasonable for Under Armour to continue growing international sales and footwear at higher rates than its more-established apparel business.
Focus on international expansion
Under Armour continues to aggressively spend on growing its distribution network overseas. On the earnings call, founder and CEO Kevin Plank pointed out that the company ended 2015 with three times as many international retail outlets as it started with. Yet even with that expansion, international sales only just reached a double-digit share of revenue in the past quarter.
According to its most-recent analyst presentation, the company plans to expand into nine new countries in 2016 on three continents.
Footwear: Lightning in a bottle, or sustainable growth?
Plank made no bones about the importance of the Stephen Curry line of basketball shoes, which have become one of the best-selling shoes on the market. Curry has taken the basketball world by storm, and his team, the Golden State Warriors, followed up last season's NBA championship with what has so far been the best season ever for a team in league history.
The concern, of course, is how viable that will be for the long term. Nike signed Michael Jordan early in his career, and its shoe business is still benefiting from His Airness' legend more than 30 years later. It's unreasonable to think that Curry will be as powerful a force for the Under Armour shoe brand as Jordan has been for Nike, but he certainly is the keystone in the shoe business today.
Fortunately, Under Armour has multiple well-established athletes representing its products, including top golfer Jordan Spieth, and football superstars Tom Brady and Cam Newton, among others. Management also touted its new line of high-end running shoes, and pointed out that the company has doubled the number of shoes that retail for more than $100 during the past year.
The company has also doubled the size of its footwear team, including creating a dedicated women's team. While these investments will weigh on margins initially, they will help fuel channel expansion and sales growth for years to come.
Is market share at home weakening?
One area of concern recently brought up by an analyst is that Under Armour may be losing market share. This was brought up on the earnings call. CFO Brad Dickerson addressed it, saying that the data that showed a decline in the company's market share only covered about 40% of actual sales, largely at long-term retailers Dick's Sporting Goods and Foot Locker, and then extrapolating those results.
Dickerson said the issue with this is that it doesn't factor in the company's direct sales and international sales channels, and also factors in sales channels that the company doesn't manage directly. This can be particularly problematic in the fourth quarter.
Frankly, that wasn't a solid answer, and didn't address concerns that Under Armour may be losing share in its U.S. retail outlets. This is something that investors should keep an eye on. The company has made inroads, and shouldn't let its focus on other categories and segments cause it to lose market share at home. To mimic a prior Under Armour marketing campaign, the company must protect its house.
Plank chimed in on this topic, as well, pointing out that Under Armour has less than half as many retail distribution points as its largest competitor, Nike. In other words, there's still a lot of room to expand here at home. The company has been steadfast that it will double its North American sales from 2014 levels by 2018.
Looking ahead
Under Armour's growth ambitions are very aggressive, with the company forecasting another 25% sales-growth year in 2016. It may seem crazy to expect it to keep up the pace; but even after years of expanding, its sales are only about 12% of Nike's, and the global middle class is expanding faster than total population.
If management can keep making the right calls, and the company can continue to develop world-class products and keep top athletes wearing them, the odds are in favor of the company keeping up its pace.
