Under Armour Plowed Under

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Tossing the stock like a worn-out gym shoe, investors knocked 13% off Under Armour's (NYSE: UA) share price after the company issued disappointing preliminary results on Wednesday. Most of the major news outlets did a fine job of telling you the "whys" of the sell-off. However, precious few (my polite way of saying "none") told you much about the "what news".

But we are the Fool. That's our job. Onward:

Sales and profits
The sports-apparel maker estimates that it generated roughly $180 million in sales last quarter and $23 million in operating profit, and earned $0.17 per share. If these numbers hold firm when UA reports its year-end results two weeks from today, the full-year numbers should come to roughly:

• $725 million in revenues (up 19% year over year).
• Operating profit of $77 million (down 11%).
• Net profit per share of $0.77 (down 27%).

Valuation
Disappointing results, no doubt, and significantly lower than we were promised last quarter. But it's not all bad news. With the company's shares now trading south of $20 a stub, Under Armour looks not unreasonably priced at 25 times this year's expected earnings. Analysts still expect the company to recover its profit-growing ways once this rough patch is past, and turn in nearly 23% compounded annual growth over the next five years. Thus, it appears that Under Armour's Q4 fumble has given us the opportunity to pick up a few shares and run with 'em. But should we?

I vote, yes, and for two key reasons.

Cost control
First, listen to what CEO Kevin Plank had to say about Wednesday's bad news: "Understanding the current environment, we will focus greater precision on cost management and prioritize our investments for the long-term growth of the Brand."

Plank realizes that the results shown above are going to push Under Armour's operating profit margins for fiscal 2008 down to sub-11% levels. That's inferior to what rivals like Deckers (Nasdaq: DECK), Nike (NYSE: NKE), and Columbia Sportswear (Nasdaq: COLM) boast, and wholly unacceptable in a premium brand like UA -- where products should command high price tags and generate outsized profit margins. With sales still growing nicely, the key to improving profits is cutting costs.

Inventories
Key to such cost-cutting is getting inventories in hand (a perennial theme of my past writings about UA) to avoid the necessity of clearing out stale inventory at a loss. In this regard, management has committed to growing inventories "in line with net revenues," and UA's latest update suggests it's hewing to that line: "Inventory at year-end, which includes approximately $15 million of running footwear to support the product launch on January 31, 2009, is expected to increase approximately 10% from the balance reported at December 31, 2007."

Relative to 19% sales growth, 10% inventory growth -- and much of that growth attributable to building out a new product line -- looks pretty reasonable to me. And management's promise to get inventory under control, its follow-through on that promise, and its continuation of keeping that promise, tell me that when Plank says he's going to get other costs in line, he means to do so.

Big picture
Before we close for today, let's widen our lens just a skosh and see what Under Armour's earnings warning tells us about the rest of the retail world. Explaining the reason UA came up short on sales last quarter, Plank cited: "lower than anticipated at-once orders and higher than anticipated cancellations in the U.S. wholesale business as well as lower than anticipated web sales." Web sales -- that's an Under Armour-specific issue. But the "at-once" bit (retail code for what everyone else calls "just-in-time delivery") and the cancellations of wholesale orders -- these bode ill for Under Armour customers such as Cabela's (NYSE: CAB), Dick's Sporting Goods (NYSE: DKS), and Finish Line (Nasdaq: FINL).

While canceling orders for UA products could mean that this brand in particular has lost popularity, I suspect the more likely reason is that retail sales have been weak across the board. Anemic orders placed for just-in-time delivery suggest that this weakness is continuing up to present day. None of this is good news for Under Armour in the near term, as this week's earnings release showed. But don't be surprised if it foreshadows similarly bad news for clothing and footwear retailers as well.

Forewarned is forearmed.

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