Shares of Under Armour (UA 2.16%) are up more than 5% this afternoon after the company reported beating analysts' expectations in the fourth quarter. The athletic apparel brand provided strong sales over the fourth quarter, and seemed to be untouched by the weak customer demand that plagued other retailers over the holidays. The company has recently set its sights on an increase in sales from its footwear division, and that goal played out well over the last quarter. Here's a rundown of the results, and what investors should be looking for over the next year.
Fourth-quarter success
Under Armour made a strong push when it needed one, and revenue climbed 25% in the quarter, resulting in a 25% gain over the course of 2012. Earnings per share rose 52% to $0.47, beating expectations of $0.46. The jump in revenue marked the 11th straight quarter of 20% or higher increases, and highlights why the company is trading at a P/E close to 50.
Sales of footwear, which the company has focused on recently, increased 43% and accounted for 9% of the company's total sales. In the third quarter, the company said that it still felt like it was in the early stages of breaking into much of the footwear market. CEO and founder Kevin Plank said, "Our [market] share in Running is in the low single digits, but we're in the early stage of growth and just now finding the right cadence in this $6 billion category in the U.S. alone." So far, the company has focused on its cleated footwear market share, but an increase in running shoes could mean big earnings around the corner.
Finally, Under Armour saw a nice turnaround in free cash over the last year, with capital expenditures from 2011's purchase of its new headquarters finished up. That coupled with a big lift in cash from operations -- up to $200 million from 2011's $15 million -- giving Under Armour plenty of cash to work with in 2013.
The coming competition
It's going to need that spare cash, too, as footwear is a dicey game. By entering into competition in the world of running, Under Armour is making a bold move against Nike (NKE 1.66%), which is still the king of footwear. In the three months that ended in November, Nike earned $1.5 billion in revenue on footwear in North America alone. That's just shy of Under Armour's full-year revenue, which came in at $1.8 billion. Until now, Under Armour has merely bumped up against Nike, which only does about a third of its business in apparel.
Stiffer competition could mean that Under Armour starts to lose out on its gross margin due to competitive pressure. Gross margin fell over a percentage point in the fourth quarter due to an increase in shipping and a shift in product mix. The company managed to avoid having its bottom line affected by increasing efficiency at the selling, general, and administrative level, which cut more than 3.5 percentage points off those costs. Right now, strong margins are helping Under Armour afford its high valuation, and investors should watch closely for any signs of increased competition, which could severely impact the share price.
Under Armour may also see more competition from lululemon athletica, which has a similarly high valuation. Recently, Under Armour's management team has talked about the value of the women's business to the company's long-term growth. Right now, the biggest product lines have been sports bras and base layers, but that may change as the company is focused on new product development.
The bottom line
Under Armour posted a solid quarter of growth, and it continues to make a push for new market share without the usual margin depression that comes with that kind of move. But the next year is going to present new challenges for the company, as it starts to rub up against the well-defined walls around Nike and the oddly flexible walls of Lululemon. That's not necessarily going to hurt margins, but I'd be shocked if gross margins finished 2013 at their current position.
Investors should also watch for strong growth in the footwear department. Under Armour will have sunk a decent chunk of time and cash into developing footwear to compete with the other big boys, and a failure on that front would be a massive setback. If there's one spot to watch in 2013, it's shoes.
