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Investors have been treating Under Armour (NYSE: UA ) like a smelly ol' gym shoe this year, tossing the shares in the proverbial trash bin; they’ve plummeted from a high in the mid-$60s to a pre-earnings low of nearly $18. But if you'll permit me to run with an already noxious metaphor, yesterday we pulled the shoes out of the garbage and gave 'em a good shot of Lysol, and this morning they're smelling like new again.
After reporting 28% improvement in earnings, UA shares leapt an astonishing 26% in a single day. And for this, you've got to credit the company's ability to maintain strong margins on its goods. With the gross rising to 51% last quarter, UA's leaving Deckers Outdoor (Nasdaq: DECK ) , Nike (NYSE: NKE ) , Columbia Sportswear (Nasdaq: COLM ) , and Wolverine World Wide (NYSE: WWW ) in the dust. And as good as this sounds, it's only the smallest part of the good news.
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Last quarter, I gave credit where it was due: to UA management, for making a good start on its promise to pare inventory growth until it's "growing in line with net revenues." In Q3, they completed the job. With sales up 24% year over year in Q3, inventories grew just 8%.
What's more, as COO Wayne Marino noted, ever since poaching David McCreight from Sears Holdings (Nasdaq: SHLD ) in July: "Inventory control has been a major focus for the organization [leading] to the team's successful delivery on those expectations. By year end, we still anticipate inventory growth to remain below the rate of revenue growth, and for 2009, we are striving for improved inventory efficiency." So not only has UA promised to fix this problem, and not only has it delivered on that promise, but UA's now promising to improve its inventory situation even further.
Why that's important
At last report, UA was still running to the negative on free cash flow -- not the best place to be in the middle of a recession. Now that it's tying up less cash in unsold inventories, I hope we'll see cash profitability change for the better.
Speaking of which, if I've a quibble to make here, that's it -- the fact that we can only "hope" for good news on cash flow. Fools know that a perfect earnings report shows you the money. So ideally, we would all be able to see this for ourselves in a cash flow statement -- but UA continues to withhold this essential document.
Still, after reading those numbers that UA did deign to reveal yesterday, I'm a lot more comfortable trusting UA on this point today.