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Under Armour Beats Q3 Estimates, Stock Falls on Gross Margin Decline

Under Armour, Inc. (UA) announced third-quarter financial results Thursday that beat analyst estimates on both the top and bottom lines. However, a decline in gross margin caused some concern among investors, sending the stock down by 5.4% on the day.

For the three months ended Sept. 30, 2015, net revenues increased 28 percent to $1.2 billion from $938 million in the prior year period, pushing quarterly sales past the billion dollar mark for the first time in the company’s history. On a currency neutral basis, sales rose 31 percent.

Net revenues from apparel increased 23 percent to $866 million from $705 million in the prior year, driven primarily by enhanced product offerings in baselayer and the expanded Storm innovation platform. The company saw significant growth in golf and outerwear.

Footwear revenues jumped 61 percent to $196 million from $122 million in the prior year, primarily reflecting continued product expansion across the running, basketball, and training categories. Sales from accessories rose 22 percent to $104 million from $85 million in 2014, driven primarily by new introductions across the bags category.

Direct-to-consumer net revenues, which represented 26 percent of total net revenues for the third quarter, grew 28 percent year-over-year. The company launched six new country websites during the quarter, bringing the total to 24 sites around the globe.

By region, North America sales rose 25 percent to $1.1 billion. International net revenues, which represented 11 percent of total net revenues for the third quarter, grew 52 percent year-over-year. The company’s largest EMEA (Europe, Middle East and Africa) markets, in the U.K. and Germany, contributed the strongest growth in the quarter. In Asia-Pacific, both DTC and partner store expansion continued to drive the business.

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For the first nine months of the year, apparel represents 69 percent of total revenues, compared to 72 percent in the same period last year, while footwear has increased from 16 percent to 18 percent of total revenues.

Chairman and CEO Kevin Plank said in a statement, “Our scoreboard in the third quarter not only marked our 22nd straight quarter of at least 20 percent net revenue growth, but also our first $1 billion quarter. Our ongoing success in 2015 has been driven by innovative, head-to-toe product, combined with game-changing performances by our athletes.”

Gross margin for the third quarter of 2015 declined by 80 basis points to 48.8% from 49.6% in the prior year’s period, primarily reflecting the impacts of foreign exchange rates, sales mix, and higher freight expense, partially offset by favorable product margins.

SG&A expenses as a percentage of net revenues increased to 34.6% from 34.0% in the prior year, primarily reflecting 2015 openings of global Brand House stores and investments to support the Connected Fitness business.

Operating income increased 17 percent year-over-year, to $171 million. Net income increased 13 percent to $100 million, or $0.45 per share, compared with $89 million, or $0.41 per share in the prior year’s, inclusive of the impacts of the Endomondo and MyFitnessPal Connected Fitness acquisitions.

Plank cited the company’s Rule Yourself global marketing campaign, that highlights the training and dedication that drives Under Armour athletes to be their best on the biggest stage, as a key component of the brand’s marketing success. The campaign features Tom Brady, Misty Copeland, Stephen Curry, and recently named PGA Tour Player of the Year Jordan Spieth. “When combined with over 150 million unique registered users across our Connected Fitness community, logging more than 6.5 billion food items and 1.5 billion workouts year-to-date,” Plank said. “Our brand is resonating with more athletes than ever before and we are investing to not only build deeper relationships with these athletes today, but fulfill our longer term vision to change the way athletes live.”

The company increased guidance for 2015 net revenues from $3.84 billion to $3.91 billion, representing growth of 27 percent over 2014, and for 2015 operating income to $408 million, representing growth of 15 percent over 2014. However, one piece of negative news around fourth quarter is that the company expects gross margin to deteriorate another 100 basis points due to continued strength of the dollar, and to the need to liquidate larger-than-expected amounts of excess footwear inventory.

The 2015 guidance continues to reflect the net dilutive impact from the Connected Fitness acquisitions, as well as the impact of the strong dollar negatively affecting operating margins within its international businesses.

Plank said, “We are experiencing powerful brand momentum in 2015 and we continue to invest to capitalize on our success in the near-term while establishing the foundation for sustainable growth in the future. We are confident that the building blocks to reach our target of $7.5 billion in net revenues by 2018 are firmly in place. As we think bigger about the opportunity of our brand, an ongoing focus on investing in key areas like footwear, international, Connected Fitness and manufacturing capability will position us for the long runway of growth beyond just the next three years. Still, with all the success we have seen to date, we firmly believe that we are just getting started.”