Under Armour (UA), a developer and distributor of athletic apparel, footwear and accessories, is scheduled to report its Q3 2013 results on October 24. It has recorded over 20% top-line growth during the last 13 quarters. We believe the company will be able to continue its growth momentum in the third quarter, as it is still scratching the surface of its various growth drivers, including the women’s, international, direct-to-consumer, and footwear businesses. Our profitability outlook for the third quarter is also positive as we think the operating margin could rise on an annual basis in Q3.
Recap Of Q2 2013 Results
Under Armour reported net revenue growth of 23% annually in Q2 2013 to $455 million, helped by solid performance across all product categories. Apparel sales, which comprise about 75% of Under Armour’s net revenues, rose by 23%, representing the 15th consecutive quarter of more than 20% growth in this product category. Footwear and accessories sales rose by 21% and 30% annually respectively in Q2.
The company’s profitability also improved in the second quarter. Its gross margin rose to 48.3% as compared to 45.9% in Q2 2012, due to lower input costs and a favorable sales mix. Additionally, its operating margin increased by 390 basis points annually to 7.1% due to higher gross profit and reduction in selling, general and administrative expenses (SG&A) as a % of revenue.
Profitability Outlook For The Third Quarter
In the third quarter, Under Armour’s management expects the gross margin to decrease on an annual basis. On an operating profit level, we think the company’s SG&A expenses as a % of revenue could decline in Q3, resulting in an operating margin that is modestly higher as compared to the prior year level.
Various Growth Drivers Could Help The Company Maintain Its Growth Momentum
We believe Under Armour is poised for continued strong growth in the future, owing to its key growth strategies of expanding the women’s, footwear, international and direct-to-consumer businesses.
The women’s and footwear businesses represent important growth pillars of the company. Previously being more popular for its men’s products, Under Armour is re-aligning its store presentation and product portfolio to attract more female customers. Within the footwear business, the company is trying to enhance its appeal with Highlight baseball and football cleats, Spine running platform and a new SpeedForm technology. Additionally, the distribution of both women’s and footwear products is being expanded across its wholesale and direct-to-consumer channels. Owing to these efforts, we expect a strong growth rate for Under Armour in the long-run.
Expansion in international markets and direct-to-consumer businesses represent other growth strategies of the company. UA aims to enhance its operations in Asia, Europe, Australia and Latin over the next three years and is making several efforts to accomplish this goal. In addition, several new store openings along with expansion in the average size of existing doors is planned in the near-future. Hence, we think the revenue growth in both these segments will outpace the overall revenue growth of the company in the next few years.
We will update our $66 price estimate for Under Armour after the earnings release.
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