Under Armour Says Revenue Will Be Lower: Shares drop 13 percent as news surprises analysts
Source: The Daily Record – January 14, 2009
By: Liz Farmer
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Under Armour lowered its 2008 guidance for analysts Wednesday — including decreasing annual revenue expectations by about $40 million — as retailers across the nation struggle to recover from one of the worst holiday sales seasons in history.
The news took some analysts by surprise and prompted a 13 percent drop in the value of Under Armour’s shares. The shares, which have a 52-week high of $46.80, lost $2.92 Wednesday to close at $19.40.
The Baltimore-based sports apparel company lowered its net revenue expectations to $725 million or $726 million compared to a previous estimate of $750 million to $765 million. In April, Under Armour had estimated annual revenue as high as $775 million.
Income from operations estimates also was cut by 25 percent. Under Armour, which is scheduled to release its annual report on Jan. 29, is predicting about $76 million to $78 million for that category in 2008, compared to a previous estimate of $97.5 million to $104.5 million. Nearly a year ago, the company had predicted an income as high as $110.5 million for 2008.
“We expected pressure … but this level was surprising,” analyst Thomas D. Shaw said in a report he released for Stifel Nicolaus & Co. based on the developments. He noted that while his visits to stores during the holidays had shown a “decent holiday sell-through across most geographies,” he had underestimated the degree of retailer caution.
Under Armour also estimated a steep drop in its fourth quarter diluted earnings per share to no higher than 18 cents, less than half of analysts’ estimates of 49 cents. It reported earnings of 34 cents per diluted share for fourth-quarter 2007.
Fourth-quarter income from operations is expected to be in the $22 million to $24 million range, down from $28.25 million a year earlier.
Net revenue is estimated to be between $179 million and $180 million for the fourth quarter, compared to $174 million a year earlier. According to Under Armour’s release, the weakened retail climate contributed to lower-than-anticipated online sales and a higher number of cancellations from the wholesale business than expected.
“The impact to fourth-quarter income from operations and diluted earnings per share was primarily driven by the lower than expected sales volumes,” the release stated.
The news came the same morning the National Retail Federation announced holiday sales for the combined November-December months fell 2.8 percent — the first time a decline has been posted for that period since the organization been tracking it in 1995.
Jeffrey P. Klinefelter, analyst for Piper Jaffray, noted in his latest report that Under Armour was not immune from the discounts and promotions that were lowering profit margins for retailers in an effort to attract customers this season. That may have led to an overestimation of the company’s earnings.
Meanwhile, Under Armour reiterated it is moving ahead with its plans to launch a new line of running shoes on Jan. 31. The company said its year-end inventory has increased by about 10 percent compared to a year earlier to support the new product.
Klinefelter noted the running shoe could increase Under Armour’s footwear sales by as much as 76 percent next year. While the cross trainers Under Armour introduced last year were well-received, Klinefelter said he’s not sure how the new product will be accepted by runners. But he said Under Armour does appeal to a more general audience.
However, whether consumers will be buying any new product remains a question mark. While the retail industry as a whole is suffering, demand for everyday items such as socks, intimate apparel or jeans should hold up better than demand for more discretionary items like fitness apparel, according to Ron Wince, CEO of the Arizona-based retail consulting firm Guidon.
“One thing that’s a wild card is with New Year’s resolutions, you might get a bunch of people investing in that stuff,” he said. “But the running shoe category is very crowded. There’s certainly a following of people who like Under Armour … but I think some of the higher-end models are not going to move nearly as well.”
But on the brighter side, Under Armour’s competitors are subject to a similar financial future.
“You’re going to see more of this — I think this is just the beginning,” Wince said. “I would not be surprised to see Nike or other competitors have similar [financial] reporting situations.”
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