Source: Under Armour
Twenty consecutive quarters of sales growth greater than 20%. It has to be a record -- or at least in the top five, right? That's what apparel and footwear -- oh, and connected app maker, too -- Under Armour (UA 3.34%) reported when it released first quarter earnings on April 21. And in typical fashion, Mister Market is selling, with the stock down about 4% following the release.
OK, in fairness it's not all roses and puppy dogs, as earnings actually came in below the year-ago quarter, and this quarter's 25% growth pales in comparison to the 32% sales growth the company reported for all of last year.
As we talked about in the earnings preview a few days ago, there are a handful of key things that investors need to follow closely. So was last quarter good or bad? Let's take a closer look now.
Mixed messages & cutting through the noise
Depending on what website you visit, it is being reported that Under Armour both beat and missed Wall Street analyst estimates for sales and earnings. This is yet another reminder why analyst estimates should be nothing more than -- to paraphrase pirate captain Barbossa -- what you'd call "guidelines."
The short version is the company came in around a penny above or below average earnings per share estimates, which essentially means the analysts -- in average -- did a pretty good job making a guess. Here's what matters:
Under Armour's earnings decline was the result of the acquisitions of Endomondo and MyFitnessPal in the quarter, for a combined $560 million. Management is convinced that these two apps -- which will combine with the 2013 purchase of MapMyFitness -- will help the company further establish itself as the brand of choice for elite athletes, as well health- and wellness-oriented consumers. It's a simple reminder that net income has a lot of variables, especially for a company that's investing heavily in growth. There's a big difference in earnings falling because of durable long-term challenges and a company investing in sustainable growth.
The big two
Stephen Curry is helping Under Armour sell more shoes. Source: Under Armour
Footwear and international sales -- a drum I've been beating for some time -- are the big keys right now, and both segments grew strongly in the quarter. Footwear sales increased 41% in the quarter, and at $161 million accounted for 20% of first quarter sales, versus 18% in the same quarter a year ago. International sales also continues to grow strongly, up 74% from a year ago and accounting for 12% of total first quarter sales.
As a comparison, Nike counts on shoes for about 60% of its total sales, with more than half of revenue coming outside North America. That's not to say that Under Armour's results should look exactly like Nike's in the future, as Under Armour's legacy is in apparel, but more about the context of the market opportunity. Nonetheless, the company's apparel sales "only" grew 21% last quarter versus a year ago, a relatively low rate compared to the company's historical results.
Don't get me wrong: I don't think apparel sales are necessarily lagging, or that 21% sales growth is a yellow flag. But footwear remains a massive opportunity, and a lot of apparel sales growth will be international.
Financial housekeeping
Under Armour added a lot of debt to fund the Endomondo and MyFitnessPal acquisitions, ending the quarter with $677 million in total debt. The company also ended the quarter with 29% more cash than the prior year, though the $232 million total was well down sequentially. The additional cash on hand last quarter was used along with debt to help fund the above acquisitions.
The company also saw its operating costs rise slightly in the quarter, with SG&A increasing to 43.5% of revenue from 42.7% last year. This was also due to the acquisitions above, the additional costs to staff developers and support personnel to manage the apps, and to support the user base of more than 130 million people.
Gross margin percent remained steady at 46.9%, a positive occurrence considering that growing international sales could actually have a negative effect on margins right now, due to the strength of the U.S. dollar. Over time currency exchange tends to balance out, so even if it does negatively impact margins in coming quarters, growing international sales remains a major priority for the company.
Looking at the bigger picture
As of this writing, the stock is down about 4% as the market digests the report. While this isn't last year's 30%-plus results, 25% sales growth is nothing to scoff at. Furthermore, the company continues to invest heavily in product development, and its major connected fitness initiative is likely to pay dividends as more consumers live in a connected world.
Management also increased its outlook for the full year, bumping its sales estimate for the year up by about $20 million, and slightly increasing operating income targets. While operating income growth is expected to come in at about half of revenue growth in 2015, it's important to note that this is because of the impacts of the acquisitions, and it's probably not a long-term concern that profits are growing at a slower rate than sales right now.
All things considered, Under Armour continues to report strong growth, and CEO Kevin Plank continues to invest in key drivers of more future growth. In the short-term this probably contributes to making the stock look even more "expensive" on a valuation basis, but at the same time is adding big value for long-term investors.
