Under Armour officials say that its strong second-quarter earnings report Tuesday is proof that the sports apparel company is giving customers what they want.
But the Baltimore company saw a hit to its profit margins and admits the operations side of the business needs some work.
"As a team, we are committed to getting our operational capabilities to the same level of execution and leadership as our brand and product, so that we can fully benefit from the demand of our consumer," CEO Kevin Plank told analysts during a conference call Tuesday.
Sales of Under Armour apparel and shoes are so good that the company announced it was raising expectations for revenue and profit for the year. Even a new running shoe is doing well, a year after the company decided to revamp its footwear line because of lackluster sales.
The company expects sales for the year to come in the range of $1.42 billion to $1.44 billion, an increase of 33 percent to 35 percent from 2010. It forecasts operating income in the range of $155 million to $160 million, an increase of 38 percent to 42 percent from last year.
Under Armour had previously anticipated year-end net revenues in the range of $1.37 billion to $1.39 billion and operating income in the range of $149 million to $153 million.
The performance fits into the company's goal to double revenue to more than $2.1 billion by 2013.
But Under Armour also reported a decline in gross profit margins for the quarter, as it had trouble managing growth and predicting what products, and how many, consumers would buy. Gross margins — profit before accounting for shipping costs, employee salaries and other operating expenses — dropped to 46.3 percent, compared with 48.8 percent a year ago.
Under Armour had expected the company's gross margins to decline a percentage point for the full year, but now expects them to drop by 1.6 to 1.8 percentage points.
The margins were hurt in part by the company's underestimating the amount of product it needed to manufacture for its retail customers, said CFO Brad Dickerson. Under Armour paid the retailers penalties for not delivering enough goods.
The company's factory outlet stores were also selling far more overstock at deep discounts than the company had anticipated, also hurting margins.
The margin situation was further exacerbated by the company's decision to move its hat and bag business in-house, losing licensing fees. Still, net revenues from accessories during the second quarter increased 266 percent to $32 million from $8.9 million last year.
To try to improve operations, Under Armour has brought on a vice president of sourcing with more than 28 years of global sourcing expertise and a senior vice president of planning with more than 18 years of planning and supply-chain experience.
"First and foremost, our brand and product have never been stronger," Plank said during the conference call. "But managing [a] 42 percent [growth rate] …it's not going to be a straight line."
"We're not satisfied with our operational execution," he said during the call.
While thinner margins meant profits were lower than they might have been, Under Armour's soaring sales ensured that its total bottom line still grew healthily.
For the quarter, net revenues increased 42 percent to $291.3 million, compared to $204.8 million last year. Net income increased to $6.2 million, or 12 cents per share, for the quarter ended June 30, compared to $3.5 million, or 7 cents per share, a year ago.
Plank said Under Armour will increase its marketing efforts in coming months as it relaunches parts of its footwear line. Fall campaigns will feature NFL quarterback Tom Brady, Heisman Trophy winner Cam Newton and ultimate fighter Georges St. Pierre among others.
The company has spent months revamping the footwear line after disappointing sales. But a running shoe released earlier this year has been received well by consumers.
"We are building credibility with runners in the same way we did with football and baseball players," Plank said.
The company will also redesign its "store-within-a-store" concept with its retail partners, including Dick's Sporting Goods.
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