Under Armour: Trusted and Verified

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No doubt about it, congratulations are in order for Under Armour (NYSE: UA) today. Last week, previewing the company's Q2 2008 earnings report, I threw down the virtual gauntlet before management, thusly:

Acknowledging investors' concerns over UA's rapid rise in inventories, Plank [has] assured us that ... "inventory growth [will] decelerate beginning in the second quarter, with inventory growing in-line with net revenues by the end of the third quarter." .... We plan to trust... but verify.

Verify first
Reviewing the numbers, it appears that Plank isn't quite where he promises to (eventually) be just yet. But there's no doubt that he's moving in the right direction. Three months ago, I castigated the company for allowing its inventory levels to more than double against "only" 27% growth in sales. This time around, management accelerated sales growth to 30% while cutting the pace of inventory growth in half.

Then trust
Actually, the news was better than that; inventories rose only 43% year over year, and some of that may have been associated with UA's much-heralded entry into the footwear market. While there's still progress to be made, if management fulfills its latest promise to match inventory growth to sales growth "by the end of the third quarter and inventory to grow at a rate below net revenues by the end of the year," I may just have to buy a few of these shares myself.

The rest of the story
Now that we've covered the key point of the UA story, let's quickly review the headline numbers. Sales were up 30%, as I said. Profits were down year over year, but triple what analysts expected -- UA earned $0.03 instead of the predicted penny.

Still, a decline's a decline. Let's explain that before we close. According to UA, footwear carries with it lower gross margins than does apparel. Accordingly, gross margin for the quarter dropped 370 basis points to 45.3%. For context, and to, well, verify UA's explanation, consider that footwear specialists K-Swiss (Nasdaq: KSWS), Skechers (NYSE: SKX), Timberland (NYSE: TBL), and even Nike (NYSE: NKE) all sport between 43% and 46% gross margins. Wolverine (NYSE: WWW) illustrates the point even better, grossing less than 40% on its sales.

Foolish takeaway
With free cash flow still anemic and a trailing P/E sitting north of 30 (against 25% promised growth, and 23% predicted by the analysts), UA is not yet a value in my book. And yet, its assertions all check out, and management is developing quite the reputation for being true to its word. As growth plays go, this one might be worth a flyer.

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