Athletic apparel and footwear maker Under Armour (NYSE:UAA) released its third quarter business results this morning, and in short, the company crushed it, and is nailing on all its key growth initiatives. Total sales were $938 million, beating analyst estimates by $12 million and up 30% from last year, while earnings per share came in at $0.41, a 22% increase.
Let's take a look at the highlights, as well as what the future looks like for the athletic apparel company.
Record-breaking performance happening
At the beginning of the year, management was guiding for $2.87 billion in revenue. Every quarter since, the business has outperformed expectations, and guidance has been raised. As part of the Q3 announcement, the company raised guidance again, and now management is expecting to exceed $3 billion in sales this year.
Further, the company is investing to keep its growth rate high. We will talk more about that later.
Footwear sales increased 50% last quarter to $122 million, largely driven by new product releases in the running and basketball categories. As Under Armour expands its offerings in these categories -- shoes that you'll see in high school and college halls as often as in gymnasiums and athletic fields -- there's significant room to continue expanding this business.
Footwear and international sales combined were worth about 35% of sales growth, according to CEO Kevin Plank on the earnings call.
International sales accelerating
While it's important to remember that this part of the business is really just getting started -- representing less than 9% of sales so far this year -- the long-term potential is large. International sales grew 94% last quarter, nearly doubling the prior year's period.
The company has put increased focus on its international business over the past year, both through what it views as a better geographical management structure, as well as more recent efforts to expand both bricks-and-mortar presence, and through its direct Web sales in international markets. This past quarter, the company launched e-commerce websites specific to the U.K, Germany, and France, as well as optimizing its mobile websites globally.
How important is international growth? Plank took the call from the company's Hong Kong office where he is on a tour to meet with multiple potential partners in Asia. Plank highlighted that the company is "overspending" to market its international business. While it typically spends 11% of revenue on marketing, international marketing is 15% of sales.
Apparel business still growing
As Plank said on the earnings call, this makes 20 quarters in a row that the company has reported 20% of better sales growth in its apparel business. That's five years of consecutive 20%-plus growth. The company's apparel business grew 26% last quarter, largely driven by women's and kid's categories, though the men's category remains strong as well.
The apparel business is the company's core and its legacy, and it doesn't look like management is forgetting that any time soon, despite the growth rate of its shoe business.
Paying too much to grow?
One look at the results over the past year, and it's easy to see that the top line (revenue) is growing faster than the bottom line (earnings per share). Sales, general, and administrative expenses as a percent of revenue were 34% last quarter, versus 31.7% in the year-ago period.
However the increased costs are largely by design. As I mentioned earlier, the company is spending a higher percentage of international revenues on marketing, and the costs to expand the business into new markets aren't cheap. However, making those investments today could pay dividends down the road. The company is opening a new footwear facility near its Baltimore headquarters, as well as expanding in Portland, Oregon. These new facilities will better support product development and innovation, which are critical to growing its market share.
On the other side of the coin, gross margin has increased this year. In the 3rd quarter, it was 49.6%, versus 48.4% last year. Plank said on the call that he expects the company to see a "similar gross margin improvement" in 2015, largely due to improved process and the benefits of scale.
Can Under Armour keep up the growth?
Under Armour's performance this year has been amazing, and the company continues to invest in product development, marketing, and expanding its ability to meet demand. Investment in international markets and footwear are huge, and despite the 50% and 94% growth rates in these segments, they still represent a very small part of the company's total sales.
Kevin Plank emphasized this on the earnings call, pointing out that international sales will be less than 10% of total sales this year, and eventually should be at least half of the company's business. He also pointed to footwear as eventually being larger than apparel, and women's apparel as one day being larger than men's apparel. These are simply enormous levers for future growth.
Will they lead to a sustained 30% growth rate? That's a lot to ask for, but remember that the company's sales are only about 10% of Nike's (NYSE:NKE), and about 15% of Adidas AG (NASDAQOTH:ADDYY). There's room to grow.
Jason Hall owns shares of Under Armour. The Motley Fool recommends Nike and Under Armour. The Motley Fool owns shares of Nike and Under Armour. 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.