Athletic apparel retailer Under Armour (UA) reported solid-third quarter performance Thursday morning. Revenue grew 24% year-over-year to $575 million, in-line with consensus estimates. Earnings increased 23% year-over-year to $0.54 per share, a few cents better than consensus expectations. For a read on why we think Under Armour is overvalued, please click here.
Gross-margin pressured eased, as margins increased 30 basis points year-over-year to 48.7%. Inventory builds finally alleviated, falling 2% year-over-year to $312 million. Though CEO Kevin Plank cited sourcing issues and "outgrowing" suppliers, we think the company is cleaning up its balance sheet and realized it had far too much inventory on the books. The firm knows how reliant it is upon weather for winter quarter sales, so we like its cautious stance going into winter this year to avoid taking margin hits on unsold inventory.
Revenue growth by segment was a bit surprising, in our view. Apparel grew 22% year-over-year to $444 million, lower than the 24% run-rate in the second quarter. Given the increased distribution channels and strong sell-in, we thought numbers would be a bit stronger. Footwear growth slowed to 21% from 44% in the second quarter. We think this is the result of a mediocre product lineup for the basketball season. Footwear growth is integral to the brand's growth story, assuming international expansion remains cautious, but we think execution thus far has been poor. Under Armour continues to take large risks in product offerings, but we think the strategy will backfire-at least for this season. The UA Spine takes inspiration from the brand's running line, but looks like a copycat Nike (NKE) product, which we don't think will resonate with consumers. And the flagship shoe, the UA Charge BB looks more like a wrestling boot than a basketball shoe. We expect to see both sitting in outlet stores for $50 or less come summer time. Check out some pictures here.
The firm's Accessories segment continues to be the stand-out business, growing 37% year-over-year to $54 million. Underwear seems to be the natural extension of the Under Armour name, and we see a long runway for growth in its performance underwear product for both men and women. International growth remains anemic at just 0.7% year-over-year, though it only accounted for 6% of revenue. North American revenues remained strong, increasing 25% year-over-year to $543 million. Under Armour remains strictly a North American growth story at this point-good in a slowing global economy, but not good for long-term value. We'll continue to discount its international strategy until we see some traction other than expensive soccer club sponsorships.
In a departure from recent quarters, the firm actually generated over $20 million in operating cash flow during the quarter, shrinking the year-to-date operating cash shortfall to $6 million. Our two most persistent issues with the company-cash generation and inventories-finally improved. Though it's not a cash cow like Nike or Lululemon (LULU), we're optimistic that Under Armour will generate decent cash flow during the fourth quarter. Shares remain overvalued, in our view, but we think the company's strong brand name, positive cash flow trends, and its lack of exposure to Europe make it a weak short candidate. Underwhelming guidance also leaves significant upside in the event of a fourth quarter "beat." Therefore, we won't be establishing a put-option position in the portfolio of our Best Ideas Newsletter (click here for the academic support backing our portfolio) at this time.