A strategy by Under Armour to aggressively expand its outlet store business seems to have paid off as the sports apparel company announced Tuesday that its second-quarter earnings more than doubled on increased apparel sales.
Growth of apparel sales was the strongest in 10 quarters, with much of the increase being driven by direct-to-consumer sales, which increased 60 percent for the quarter ended June 30. Direct-to-consumer sales include outlet stores, full-price stores and the Web business.
The strong sales resulted in better-than-expected second-quarter earnings and for the first time put the prospect of $1 billion in annual revenue within the company's grasp.
Under Armour originally opened the stores to sell excess items that did not sell in its full-price stores or at retail partners such as Sports Authority. But the demand has been so great, the company is looking to sell more products made specifically for the outlet stores — something it already does but could expand. The line is typically cheaper than that sold at other stores, although of similar quality.
"The basis for the factory stores initially was to liquidate our excess inventory, and then what we did was we learned that there is a consumer out there that we could reach," Wayne Marino, Under Armour's chief operating officer, said during an analyst call. "We're finding that the factory house is another opportunity, another point of distribution to reach other athletes."
The company opened six new factory stores during the second quarter, increasing the number to 45. It expects to end 2010 with 52 to 54 outlet stores across the country, a year-over-year increase of nearly 50 percent.
"They've done really well in apparel overall, but a large portion of that has come from the factory stores," said Robert Kennedy, an analyst with the research firm Gradient Analytics.
Because Under Armour is still a fairly new company, it still has markets where it can grow to reach new shoppers, Kennedy said.
"When you compare them to some of the larger competition they have, they still have plenty of room for growth," Kennedy said. "It's not cannibalizing them a whole lot; it's really providing another outlet for them."
Under Armour reported quarterly profits of $3.5 million, or 7 cents per share, for the quarter that ended June 30, compared with $1.44 million, or 3 cents per share, for the same period a year ago.
Sales increased 24 percent, to $204.8 million, with sales of apparel rising 34 percent.
"The best and simplest part of the apparel story is that everything was up, with strong double-digit growth across men's, women's and youth," said Kevin Plank, Under Armour's CEO and chairman. "Our growth is across the board — gender, channel, category, wholesale and direct."
Plank said the company's newer "fitted" line is doing particularly well. The fitted line is a looser fit than the compression line on which the company built its name. He addressed rumors that the company plans to launch a cotton line, though he didn't say whether they were true.
"I think what you're going to see from Under Armour going forward … is that we'll be much more sensitive to the idea of opening up to a wider, broad-based sense of consumers versus the consumer who can, frankly, handle wearing a compression T-shirt all the time," Plank said.
Footwear sales declined slightly from last year, and analysts said they are uncertain how the category will perform in the future. The company is revamping its footwear division and will launch new models next year. Sam Poser, an analyst with Stern, Agee & Leach Inc., said the company had a good quarter, but footwear is causing uncertainty about future earnings.
"We don't know exactly what they're doing with the footwear business," Poser said.
Under Armour raised its full-year financial outlook because of the strong second-quarter showing. The company is now forecasting full-year earnings per share of $1.11 to $1.13, up from $1.05 to $1.07.
Under Armour also increased its estimate for sales, saying it now expects a range of $990 million to $1 billion, up from $965 million to $985 million.