Under Armour (UA) reported strong first-quarter results that were in-line with our expectations. On the heels of the strong report, we've reassessed our discounted cash-flow model and are now forecasting more optimistic future assumptions. The high end of our fair value range is now $78 per share, as we expect the firm to raise prices on its core segment products and leverage marketing expenses better than we had previously assumed.
We initially extrapolated Nike's (NKE) slightly slower apparel growth into the view that Under Armour might struggle disproportionately in the first quarter of 2012, given the unseasonably mild weather across much of the US. However, to our surprise, sales increased 23% versus the first quarter a year ago, and net income advanced 21%, suggesting the retailer didn't have to take back or refund much unsold product from its large partners, including Dick's Sporting Goods (DKS) and The Sports Authority. This is consistent with what we've seen at their outlets, which don't hold much core product and are mostly populated with odd colors and sizes that are almost always marked down.
Footwear revenues increased nearly 24% compared to the first quarter a year ago, which we attribute mainly to new products and styles. CEO Kevin Plank pointed to strength in the Charged RC Running shoe, though we remain convinced that the company can't effectively compete with its bigger peers in terms of distribution, sourcing, or quality. Nevertheless, we think the company now is more committed to limited, profitable releases of footwear, rather than flooding the market with mediocre product. Management also pointed to strength in football (American version) footwear on the heels of a Cam Newton marketing campaign, but football footwear makes up a miniscule part of the global footwear market. Therefore, we don't expect even blockbuster success to really move the needle at the firm at all.
Although we've been bearish on the firm's international growth prospects, international sales increased nearly 32% in the first quarter of 2012 compared to a year ago. However, the $21 million in international sales are still tiny compared to the $385 million in net revenues the company raked in during the first quarter. We think sales will eventually accelerate internationally, but we do think the company will face a lot of hurdles when entering unique markets that require drastically different sales strategies than the North American market.
Overall, we think we were a bit too pessimistic in assessing the firm's ability to raise prices in the future. However, even assuming more optimistic forecasts in our valuation model, we still believe shares of Under Armour are overvalued. The firm remains on our list of firms we may pursue as put options in the portfolio of our Best Ideas Newsletter. In the spirit of transparency, we have revealed the performance of the portfolio below: