Despite Market's Reaction, Under Armour Had a Great Quarter; Here's What You Need to Know

By Fool.com

Yet again athletic apparel and footwear makerUnder Armour reports a quarter of breakneck growth. The company reported third-quarter financial results on October 22, and sales increased 28% in the period, reaching another milestone with more than $1 billion in sales in a quarter for the first time. The highlights:

  • $1.2 billion in sales, the highest ever for the company.
  • Gains in key categories were as follows:
  • Apparel sales grew 23%.
  • Footwear sales up 61%.
  • International sales up 52%.

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There were a few financial metrics that ticked lower in the quarter as well, and that's probably part of the reason the stock was trading lower after the earnings release. Let's take a closer look at the details.

What happened in Q3?The company's efforts to expand its business continue to pay off, as evidenced by the 28% growth in sales. Management also raised guidance for full-year sales to $3.91 billion, which works out to 27% growth. Considering that sales grew 25%, 29%, and 28%, respectively, in the first three quarters of 2015, there's at least a reasonable shot it exceeds its own guidance.

The costs to fund these growth initiatives, however, are also trending up. Here's a look at a few key metrics:

That's not happening with Under Armour right now, but more or less by design. CEO Kevin Plank has made no bones about it: Under Armour is investing in growth, and international expansion is coming at a price. The company said that foreign exchange was the primary factor on the gross margin percent decline. Adjusting sales for currency exchange, revenues would have increased more than 30% in the quarter.

It's important to keep an eye on the long-term trends here, but with proper context as well. In a perfect world, a company would be able to expand its gross margins, while reducing the percentage of sales that must go to sales, general, and administrative expenses. In that same perfect world, its net income (and ideally earnings per share) would grow at a faster pace than revenue.

SG&A as a percentage of revenue ticked up largely because of investments in opening global "brand house" Under Armour retail stores, as well as the investments in its substantial Connected Fitness investments.

What management saidPlank laid out the company's simple strategy early on the earnings call:

These initiatives come at a cost, especially building out a bricks-and-mortar retail channel overseas. Here's the five-year rollout plan for international expansion:

Data source: Under Armour presentation.

Each of these expansions will result in a bump in up-front costs. Over time, as sales increase, the percentage of sales impact of these markets should lessen. But for now, it's likely that some costs could continue to grow as fast (or faster) than sales in order to fund growth.

Looking ahead: Building something bigAt the company's September 2015 investor day presentation, Under Armour management laid out the company's strategy and plan to more than double the size of the business by 2018. It's an aggressive goal, but one that's, quite frankly, achievable, at least based on the decade-plus track record of execution so far.

It's also a lower target of growth than it has delivered over the past five years, though still at a strong 25% compounded annual rate.

However, as this quarter showed, that growth will come at a cost to the bottom line, as earnings and operating income will probably grow at a slower rate than sales as the company spends to expanding into new markets and new product categories. Over time, those investments should pay off with big earnings.

Will the game plan pay off in years ahead? Only time will tell. But one thing's for sure: Management's game plan has worked so far.

The article Despite Market's Reaction, Under Armour Had a Great Quarter; Here's What You Need to Know originally appeared on Fool.com.

Jason Hall owns shares of Under Armour. The Motley Fool owns shares of and recommends Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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