Under Armour Over the Top

You have to hand it to the boys from Baltimore: They really outdid themselves on Wednesday.

Expected to produce profits of $0.07 per share, sportswear maker Under Armour (Nasdaq: UARM) actually turned in $0.18 per share worth of Q1 2006 earnings. Outstanding. Sales were up 51% year over year, net profits for the firm as a whole rose 248%, and profits per diluted share did even better, rising 260%.

So from a GAAP perspective, things went just swimmingly last quarter. But how'd the company do on cash profits? Unfortunately, that's pretty hard to say, because Under Armour didn't deign to provide its shareholders with a cash flow statement in its earnings release. Looking at the balance sheet, we see that cash levels declined between the end of December and the end of March, which suggests that free cash flow declined for the quarter. But we won't know for sure until the company files its Form 10-Q with the SEC, in which it is required to disclose its cash flows.

In the meantime, I'm going to go out on a limb -- part of the way, at least -- and say that free cash flow wasn't as strong as it should have been, even if it does turn out to have been positive. The reason hearkens back to the comments I made on Under Armour's working capital management in the earnings preview earlier this week. While sales have been strong, and inventory growth remarkably restrained, there's something funny going on over in the accounts receivable (A/R) department.

We can see on the company's balance sheet, which it did provide on Wednesday, that inventories again rose much more slowly (at 9%) than sales did. This suggests that demand for Under Armour's wares remains strong.

However, my concerns over A/R are actually growing stronger, not weaker. Year-over-year A/R growth in Q1 2006 was worse than we saw in either of the previous two quarters, with A/R rising more than twice as fast as sales: 103%. I'm not sure why that's happening, but it's worth noting that rapidly rising A/R have previously been associated with companies that are "channel stuffing" -- shipping goods out to retailers faster than they can be sold to consumers, in order to book the sales and create the appearance of a successful business. Past offenders have included Bristol-Myers Squibb (NYSE: BMY), Lucent (NYSE: LU), and possiblyTASER International (Nasdaq: TASR) and Harley-Davidson (NYSE: HDI) as well.

Is the same thing going on at Under Armour? I certainly hope not. But I've yet to hear a good explanation to the contrary.

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Fool contributor Rich Smith does not own shares of any company named above.