"This, then, is what [Under Armour] must accomplish in fiscal 2009: Get operating costs under control. Eroding gross margins probably can't be helped; they're lower in footwear than in clothing, and that's just a fact of life. But SG&A spending is something management can get a handle on. It must, if it's ever going to get back to growing the bottom line for shareholders."
That's where we left off after Under Armour's (NYSE: UA ) last earnings report, a performance that was roundly greeted with "boos" from the crowd. Three months later, the company has rounded the track once again, and this time it looks like a winner:
- First-quarter sales jumped 27% to clear the $200 million mark
- Profit leapt 38%, to $0.08 per share (wait for it ...)
- Suggesting that somehow, Under Armour did indeed increase margins (wait for it ...)
- A suspicion further bolstered by the fact that operating profit rose 84% (almost there ...)
- Which was finally confirmed on the income statement: Operating costs rose only 17%, far behind sales growth.
Mission accomplished (?)
Thus, Under Armour completed the task we set for it last quarter. Operating costs are most definitely under control, accounting for 360 fewer basis points as a percentage of revenue in Q1 2009, than they did in Q1 2008. Now that the firm has delivered on its promise, the stock sports a stylin' 10.5% operating margin -- and that's great. I'm not arguing otherwise.
But the fact remains that it's still not quite what you'd expect from a premium brand like Under Armour. Premium brands -- Hansen Natural (Nasdaq: HANS ) in energy drinks, Coach (NYSE: COH ) in handbags, Apple (Nasdaq: AAPL ) in computers -- are supposed to boast profit margins that blow away the competition. They're supposed to trade on their "brand aura," producing profit margins that verge on the obscene. This, Under Armour has yet to accomplish.
Under Armour wants to be a footwear maker? Good on 'em. But if that's the standard we're to apply, then I have to point out that Deckers (Nasdaq: DECK ) earns twice Under Armour's profit per revenue dollar. Nike's (NYSE: NKE ) leading it by more than three full percentage points. Even workaday Wolverine World Wide (NYSE: WWW ) has Under Armour beat by nearly 300 basis points.
Foolish takeaway
You ran a great hundred-yard dash in Q1, Under Armour, and judging from yesterday's price jump, investors are already cheering. Problem is, the marathon's just begun.
Investors greeted the earnings news with a 13% boost to the stock price. Are David Gardner and the lads at Motley Fool Rule Breakers cheering alongside 'em? Grab yourself a free trial to the newsletter, and find out.
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