- Under Armour continued its perfect earnings history with yet another earnings beat.
- The company stretched its stellar record of 20%+ revenue growth to 24 consecutive quarters.
- Under Armour improved its outlook for 2016.
Under Armour continued its impressive performance by delivering its 24th consecutive quarter of 20%+ revenue growth. Powered by an equally impressive performance of its brand ambassador Stephen Curry and huge growth in China, the company reported a revenue growth of 30%. Under Armour stock is up 7% since the earnings came out.
The Baltimore-based sportswear company delivered a beat on both top and bottom line. The company reported an EPS of $0.04 on a revenue of $1.05 billion against analysts’ estimates of an EPS of $0.02 on a revenue of $1.03 billion. The company has either beaten or met earnings estimate in every single quarter.
It may be recalled that earlier in the month Morgan Stanley Analyst Jay Sole had downgraded Under Armour stock and reaffirmed his underperformance rating with a price target of $33, almost 33% lower than the prevailing stock price. Mr Sole had cited the SportScan data to point out a deceleration in apparel, especially the women segments. While the question was not specifically addressed in the earnings call, the 20% revenue growth in apparel segment speaks for itself.
The revenue growth was powered by strong growth in footwear and international segments. The footwear segment grew by 64% YoY, from $160.9 million to $264.24 million. The growth in the footwear segment was lead by Curry 2 brand. Sensing the opportunity in the hype surrounding Stephen Curry, the company has decided to launch Curry 2.5 in July instead of waiting for the fall to launch Curry 3.
The growth in the international segment was led by China. While China is giving headaches for most of the multinationals, Under Armour is thriving because of China. Revenue from China grew by 300% over year-ago quarter. The international revenue grew by 56% to $164 million, contributing about 14% of the company’s total revenue, up 200 basis point from last year. More impressively, the company grew by 65% on a currency neutral basis. With dollar seeing signs of weakness, Under Armour may see improvement in its revenue growth.
The Worrying Trend
But all is not rosy at Under Armour. The company continues to have a high level of inventory and account receivables have been rising. The inventory for the quarter grew at 44%, much faster than revenue growth, from $578 million to $874 million, leading to an increase in average days of inventory held to 132 days. Increasing inventory levels have a negative impact on gross margins, as the company is forced to liquidate the stock at a substantially low price to make way for newer models. Rising inventory levels also tie up capital, reducing profitability.
The company’s gross margins declined to 45.8% compared to 46.9% in the year-ago quarter. The liquidation of inventory impacted gross margins by 100 basis points and currency headwinds chopped off another 70 basis points. While currency headwind is likely to decline going forward, same cannot be said for inventory liquidation. Rising inventory will continue to impact gross margin going forward.
On the other hand, accounts receivables increased by 43% YoY to $566 million. On sequential basis receivables increased by 30%, at the same time accounts payable declined by 26% resulting in cash conversion cycle going up to 150 days, tying up a significant amount of resources. This is a worrying trend for the company.
The strong performance in the quarter has allowed the company to upgrade its 2016 outlook. Under Armour now expects its FY 2016 revenue to come in at $5 billion, higher than previously guided revenue of $4.95 billion, representing a 26% YoY growth. The operating income is expected to come in between $503 million and $506 million.
Under Armour reported an impressive quarter and will continue to do so in coming quarters. Its footwear segment is likely to show strong growth, led by a strong performance in Curry line of shoes and growth in the international segment. Softening of the dollar will aid its revenue growth. If you are looking to invest in a growth stock, Under Armour stock is a good choice.