If I ask you to tell me the first retailer that comes to mind when I say the word "sports," you very well may say "Nike." And that would be totally understandable. Some of you might just say Under Armour (NYSE:UAA), though, which would make a lot of sense considering how quickly this company has become a major player in such a tremendous market. And I think it's just getting started.
For its most recent quarter, Under Armour reported another stellar showing with sales of $642 million and earnings per share of $0.06 both beating expectations soundly. However, investors shouldn't worry too much about the short-term beats and misses come earnings season. Instead, focus on the longer-term metrics and trends that show the business is succeeding in a sustainable fashion.
If you take one thing away from Under Armour's most recent quarter, it should be this: 46.9%. This was Under Armour's gross margin for the quarter, and it was up from 45.9% during the same quarter a year ago. With retailers like Under Armour, gross margin tells us how much money the company is making on all the goods it sells, and higher is better.
Gross margin works in conjunction with sales, and even the company's inventory levels. If demand for the company's products is high, then it should be able to keep a healthy inventory level that keeps the product in stock while allowing the company to maintain pricing. If demand weakens and the company has to start lowering prices just to make sales, gross margin will suffer, taking the company's earnings right with it. The chart below shows how inventory and sales can work together over time:
The global sporting apparel, equipment, and footwear market is worth somewhere in the neighborhood of $200 billion, give or take. And to think of it as an all-or-nothing game is the wrong way to go about it. There's plenty of opportunity and Under Armour is doing a phenomenal job of grabbing share thanks to excellent product, a powerful brand and smart, driven leadership. Investors looking for a long-term idea with some excellent growth prospects would be wise to keep this one at the top of their list.
Jason Moser owns shares of Under Armour and Nike. The Motley Fool recommends and owns shares of Under Armour and Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.