Last quarter, Under Armour (NYSE:UA) made Wall Street's finest look as foolish (small "f") as if they'd appeared at work in their underwear. In answer to their predictions of $0.03-per-share profits, the sportswear maker showed up wearing $0.11. Will it be similarly stylin' Tuesday, when it releases Q3 earnings?

What analysts say:

  • Buy, sell, or waffle? Fifteen analysts follow Under Armour, with twice as many rating it a hold as a buy.
  • Revenue. On average, the analysts expect to see sales rise 34% to $171 million.
  • Earnings. Profits, however, are predicted to rise just 6% to $0.34 per share.

What management says:
CEO Kevin Plank highlighted "strong" growth in the women's apparel segment, but the growth didn't end there. Rather, it "accelerated ... across men's, women's, and youth, apparel." Unexpectedly, the "most mature business [men's apparel] is up 37%." Meanwhile, where you'd expect to see the most dramatic growth, in Under Armour's shoe business, there was instead significantly below-trend sales growth of "just" 28.9%. (When overall revenue is up 51%, it's hard to get above the trend.)

Even so, you can't miss the fact that growth remains strong across the board, far exceeding Under Armour's targeted "long-term growth of 20% to 25% for the top and bottom lines." That convinced management to raise its guidance for the year. It now expects "revenues in the range of $580 million to $590 million" and operating profit of $79 million to $81 million.

What management does:
Gross margins remain fairly stable in the 50%-ish range, with operating and net margins leveling off over the past two quarters. It's worth pointing out that management has shifted the cost of "customer incentives" (read: discounts) from the gross margin (where they showed up last year) to the operating margin lines. I'm guessing that if all things had remained equal, we'd be seeing gross margins actually rising today as the firm continues to gain scale.

Margins

3/06

6/06

9/06

12/06

3/07

6/07

Gross

49.7%

49.2%

49.6%

50.1%

49.6%

49.8%

Operating

14.5%

13.0%

13.6%

13.3%

12.7%

12.7%

Net

8.4%

7.8%

8.9%

9.1%

8.6%

8.6%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Lots of investors say Under Armour is "too expensive." With the trailing P/E ratio sitting north of 68, and not a penny of free cash flow generated over the past 12 months, I'm one of them. Now that Under Armour's in the footwear business, and we can begin to compare its multiples with those of Nike (NYSE:NKE), K-Swiss (NASDAQ:KSWS), Skechers (NYSE:SKX), Timberland (NYSE:TBL), and Wolverine (NYSE:WWW), I can't help but think that while none of these firms are growing as fast as Under Armour, their "teen-y" P/E ratios give them significantly larger margins of safety.

But price isn't everything, right? The way Motley Fool Rule Breakers lead analyst David Gardner sees it, Under Armour is "building a rock-solid brand in shoes and sportswear that will dominate for decades to come. It's hard to discount that future to a present value, but the key here is to watch Under Armour's brand and reputation. Trouble there would give me more pause than any of the sky-high metrics you could choose to recite."

I can't say I agree with David on this one, but with the stock already up 45% since he first recommended it back in August 2006, I'm reluctant to disagree too stridently. (Check out the complete list of David's picks when you accept a free trial of Rule Breakers. As well as it's done, Under Armour isn't even David's best pick -- not by a long shot.)

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Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.