Under Armour Is Slimming

Sigh. At last!

After two days of nonstop post-earnings-disappointment selling, shares of sportswear-weaver Under Armour (NYSE: UA) are finally ticking back up today. But while it appears that the "shorts" are finally covering up, the damage to UA's market cap remains considerable -- we're down about 10% from the pre-earnings high. So the question today would be: Now that the knife has stopped falling, is it safe to make a grab for the haft?

Consider the facts:

• First-quarter sales exceeded expectations, rising 27% in comparison to last year's first quarter.
• Profits, while down 70% year over year, nonetheless came in at twice analyst estimates -- $0.06 per share in all.

And consider, too, the predictions:

• Management maintained its previous guidance of about 27% sales growth to roughly $770 million ...
• ... but walked back its expected profit from a similar 27% goal, to now something more like 20% -- $104 million.

The better-than-expected Q1 performance, combined with the more muted guidance, tells you two things, neither of them particularly good. First, even though UA exceeded expectations in Q1, management does not expect its good fortune to continue for the rest of this year. (Otherwise, it would have raised guidance to account for Q1's "extra" sales and profits.) Second, holding revenue guidance steady while lowering earnings guidance is a clear warning of weakening margins going forward.

Gross margin is now pegged at 50% for the year. That number would make any of UA's rivals drool --  Nike (NYSE: NKE), K-Swiss (Nasdaq: KSWS), Skechers (NYSE: SKX), Timberland (NYSE: TBL), Wolverine (NYSE: WWW), or Columbia Sportswear (Nasdaq: COLM) all fail to break the 50% barrier. But that margin figure's still down from previous expectations.

Do these shorts make my inventory look fat?
Why the decrease? Well, as I've said already ad nauseam, UA has "issues with its pants." Q1 inventory leapt 110% year over year, far in excess of sales growth. And even looked at in the soft, Elizabeth Taylor-style best possible light, once you back out the $13.6 million in inventory attributable to UA's entry into the footwear market, you're still left with a 93% spike in the levels of unsold clothing.

And that, dear Fools, is UA's problem. A lot more clothes sitting around, collecting dust, slowly falling out of style. Clothes that must be somehow moved from warehouse to consumers -- and the best way to do that? You guessed it. Cut prices. Sacrifice margins.

Will slogging through piles of unsold clothing slow down UA's growth? Take a free trial of Motley Fool Rule Breakers, where UA is a pick, and get our analysts' thoughts on the company's inventory issues.