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Investors flee Under Armour

The Baltimore Sun

Under Armour Inc. shares plummeted yesterday to less than half of the high they hit last summer, as investors showed concern about the company's decision to sacrifice earnings in the first half of this year to spend heavily on advertising.

The shares begin falling - to finally close at $37.06, down $5.79, in regular trading - after Wachovia Securities analysts reported that the Baltimore athletic apparel company will front-load its 2008 ad spending by, among other things, running a 60-second commercial during the Super Bowl on Feb. 3.

Under Armour confirmed the report after the markets closed, adding that earnings for the first half of 2008 would probably be only 3 to 5 cents a share because of the unbalanced ad spending.

Analysts' average estimates for the period were for 39 cents a share, according to Bloomberg.

The stock was then further pummeled in after-hours trading, nearly wiping out the gains it has made for public shareholders since its shares closed at $25.30 on their first day of trading in 2005.

Under Armour hit an all-time high of $73.40 in August, briefly making founder Kevin Plank a billionaire on paper.

The divergence between Under Armour's view that expanding product lines and increasing ad spending is vital to building the brand and Wall Street's concerns about profit margin pressure has been a recurring theme throughout Under Armour's short history as a public company.

Some analysts said Wall Street overreacted to the spending on advertising.

"That's quite a decline for no official news," said Morningstar analyst Brady Lemos.

Mark Fightmaster, an analyst with Schaeffers Investment Research, said general weakness in the retail market may also be causing some concern. Under Armour is to report earnings Jan. 31.

"There's just a hint of weakness heading into earnings and in a volatile market everybody's ready to jump out," Fightmaster said.

Besides the Super Bowl commercial, Under Armour is preparing advertising for the May launch of a cross-trainer athletic shoe. Under Armour says it spends about 12 percent to 13 percent of its revenues - which were about $605 million last year - on marketing, and that that ratio won't change for the 2008 full year.

A Super Bowl advertisement this year costs about $2.7 million for a 30-second spot, according to various reports.

Bank of America yesterday lowered its 2008 earnings per share estimate for Under Armour yesterday to $1.25 from $1.30 a share because of cost pressures including the cross-trainer marketing, Super Bowl advertising and its moves to expand in Europe.

Bank of America analyst Robert F. Ohmes wrote that he doesn't expect the company's international business to become popular until 2009.

Tai Foster, an Under Armour spokesman, said executives would not comment. The company typically does not discuss fluctuations in its stock price.

But late in the day, the company issued a statement saying its 2007 performance exceeded its previous outlook, with earnings of $1.03 to $1.04 a share.

The company said it expects net revenues to increase 40 percent to $605 million, exceeding its previous estimate of $590 to $600 million. It also expects earnings to exceed the previous outlook of $81.5 million to $83 million.

Under Armour also reiterated its long-term growth targets of 20 to 25 percent a year in both sales and earnings.

Despite the concern with advertising spending, many analysts expect the cross-trainer to sell well. The company will release three versions in May, July and November.

"With a big marketing campaign, we believe sell-throughs will be strong, and the visibility for the brand could accelerate over the next several months," the Wachovia analysts wrote in their report.

Lemos said Under Armour is targeting its key demographic with the Super Bowl.

"That's a great audience for Under Armour, so I don't see why that would be a bad move," said Lemos said. "It's expensive, but it is also the most watched sporting event in the country. So I think it's a positive."

Only a year ago, some analysts believed Under Armour shares were overvalued and wondered if the company could grow fast enough to justify its price. Now analysts are wondering if it's undervalued.

"It's hard to tell people to buy retail in this environment, but I think in the long-term there is still a lot of growth in this company," said Lemos, the Morningstar analyst.


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