Under Armour: Jumping the Shark
Posted
May 14 2008, 10:00 AM
by
Andrew Horowitz
Rating:
Former University of Maryland football player Kevin Plank founded Under Armour as he saw the need for specialized apparel that would keep player's bodies cool during a tough game. It would be terrific if he can do the same for investors who are sweating uncontrollably as they watch the value of their shares pulverized over the past few months.
To be honest, I own at least a dozen Under Armour shirts in several colors and wear them often. WHY? If you have to ask you obviously have yet to try any of the Under Armour apparel products. The basic idea behind the product line(s) is simple enough: "wear Heat Gear® when it's hot, Cold Gear® when it's cold, and All Season Gear® in between."
Now that you have great insight into my weekend wardrobe, let’s move on to the substantive financial matter. In reviewing the latest financials, we noticed that inventory has been on the rise, a sign that sales are slowing. Nothing earth shattering there as we are seeing softness in all-things related to consumer spending. But, what is different with the recent report is that inventory at quarter-end included $13.6 million of Performance Training footwear in preparation for the upcoming launch. Can you say jumping-the-shark?
According to their recent release:
Based on its inventory management strategy and supply chain initiatives, the Company expects the inventory growth rate to decelerate beginning in the second quarter, with inventory growing in-line with net revenues by the end of the third quarter. Cash and cash equivalents were $17.6 million at March 31, 2008 compared to $40.6 million at December 31, 2007 and $57.2 million at March 31, 2007. The Company had no borrowings outstanding under its $100 million revolving credit facility at March 31, 2008.
Here are a few other tidbits from the earnings release on April 28th and comments:
“Net revenues increased 26.6% in the first quarter to $157.3 million compared to net revenues of $124.3 million in the first quarter of 2007. “
For a company with a P/E of 37, that equates to a PEG ratio of 1.39. That is too high in an economy that is slowing.
“The Company had previously estimated a full year gross margin improvement of 40 to 50 basis points in 2008. However, based on the most recent estimates, full year gross margins for 2008 are expected to decrease 30 basis points year-over-year to 50.0%. “
A bit convoluted, but the point is that the company was unable to control costs as expected and may continue to have difficulty in the near future.
“Based on its inventory management strategy and supply chain initiatives, the Company expects the inventory growth rate to decelerate beginning in the second quarter, with inventory growing in-line with net revenues by the end of the third quarter.”
It is apparent that they recognize that the inventory growth was excessive and needs to be addressed.
On a year-over-year basis, the balance sheet has also revealed a disturbing trend as cash/cash equivalents dropped by 70% and account receivables grew by 20%. Signs that stores and other vendors are delinquent and/or not paying.
Now they are entering into the competitive shoe market which has been dominated by Nike, Reebok and New Balance. It will be interesting to see how if Under Armour can convert the love affair for their apparel to their shoe line. Possible, but not probable.
The one piece of good news that will support shares for the time being is the recent announcement that UA will be included in the S&P Midcap 400 Index, replacing IndyMac as of May 15, 2008. We believe that based on a slowing economy and margin compression, the shares will remain locked in a narrow channel under $35.
Disclosure: Horowitz & Company clients do not hold positions in securities mentioned as of the publish date.
