Under Armour Absorbs the Heat — of Expectations

20%-plus earnings and revenue growth just wasn't enough

By Marc Bastow, InvestorPlace Assistant Editor


InvestorPlace Real America Index component Under Armour (NYSE:UA) has been on quite a ride over the past year, featuring breakneck revenue and earnings growth, a 2-for-1 stock split in June and 50% gains year-to-date.

Often, though, that kind of success leads to even higher expectations — and it appears that such is the case for Under Armour, whose shares were down more than 5% despite reporting what otherwise would be considered fantastic top- and bottom-line numbers.

UA announced third-quarter revenue growth of 24% to $575 million and 23% earnings growth to 54 cents per share, both better than the year-ago period. Indeed, the company saw growth across all marketing sectors:

  • Apparel sales up 22% to $445 million;
  • Footwear sales up 21% to $63 million driven by the UA Spine lineup;
  • Accessories sales up 37% to $54 million led by headwear revenue;
  • Direct-to-consumer sales up 31%.
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In addition, the company increased its cash on hand (now $168 million), did not borrow any monies under its existing $300 million revolving credit facility, and long-term debt and inventory levels also decreased on a year-over-year basis.

UA also provided updated guidance suggesting that FY 2012 revenues will come in right at the high end of analyst estimates at $1.82 billion, a 24% increase over 2011’s results, while operating earnings are anticipated at $206 million, or 27% over 2011 results — again, right at the high end of expectations.

The only thing I can guess is that there’s disappointment that guidance didn’t exceed expectations. If so, wow, is UA’s expectation bar set high.

Under Armour’s five-year average quarter-over-quarter growth comes in at 25.5%, virtually right at its latest figures, and certainly well within the year-end guidance. It hit its “maximum” quarter-over-quarter growth in Q2 and Q3 2011 with 40%-plus ramps, but from that point forward, a steady drumbeat of roughly 25% has been the norm.

It’s hard to argue that the retail environment has been tough the past few years, so those companies that stick out with steady, and sometimes spectacular earnings momentum are prone to get their wings clipped on any news suggesting the brakes are pumping.

Take fellow athletic apparel maker Lululemon (NASDAQ:LULU), a high-flying stock that posted great earnings and revenue numbers back in June only to see its stock hammered on warnings that it couldn’t keep up with double-digit same-store sales for eternity.

Although in a vastly different business, Chipotle Mexican Grill (NYSE:CMG) is another tale of high performance clashing with super-high expectations. That momentum stock boasted earnings increases of nearly 31% in the past five years, so all it took was two “blip” quarters of — egads! — 21% and 20% growth to send CMG careening to roughly 25% year-to-date losses.

So, yeah: It’s no fun when a high-growth company starts to settle in for a period of time as a more … i don’t know … “solid and steady” growth play. And yes, I can see why investors paying about 55 times earnings might want to take some money off the board to express some disappointment.

For my money, though, the trends at Under Armour still are pretty strong, the product pipeline remains full, and the Christmas holiday season is upon us — with UA sporting products tailored for even cold-weather action.

Truthfully? I’m more worried about the Baltimore Ravens’ recent pasting by the Houston Texans than I am by anything going on at Under Armour.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2012/10/under-armour-absorbs-the-heat-of-expectations-cmg-ua-lulu/.

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