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Under Armour winning its bet

The Baltimore Sun

Sports apparel company Under Armour Inc. took a calculated gamble earlier this year, spending millions to promote a new performance trainer sneaker even though it knew it would take an earnings hit and upset some investors.

Yesterday it appeared it was paying off.

As expected, the Baltimore company posted a profit drop for the second quarter. But the 75 percent decline was less than analysts predicted, and revenue rose 30 percent, thanks to successful sales of the cross trainer. It sold through almost a third of available inventory of the shoe in four weeks.

Net income was $1.4 million, or 3 cents a share, for the quarter that ended June 30, down from $5.7 million, or 11 cents a share, for the corresponding period a year ago. Analysts with Thomson Financial expected earnings of a penny a share. Revenue was $156.7 million, up from $120.5 million a year ago.

The better-than-expected earnings sent shares of Under Armour up $1.77, or 6.7 percent, to close at $28.40 on the New York Stock Exchange yesterday. The company also increased its outlook for income from operations.

Under Armour shares were hammered in January after it announced its plan to absorb an earnings hit in the first half of the year by spending heavily to promote the cross trainer, including millions on its first Super Bowl commercial. Marketing expenses were 14.4 percent of second-quarter revenue, compared with 13.5 percent in the corresponding period a year ago. Marketing costs will decline the rest of the year, the company said yesterday.

Footwear also has lower margins than apparel and with the launch of the cross trainer, shoes represented a much larger part of Under Armour's product mix. Footwear was 29 percent of total revenue for the quarter, compared with 17 percent last year.

"These are strong numbers that any brand in our space would be happy reporting," Kevin Plank, Under Armour founder and chairman, told analysts during a conference call yesterday. "But ... we believe it understates the overall progress we've made in the past 12 months."

The company said it expected earnings to improve in the second half of the year. It raised its outlook for income from operations for the year to $104.5 million to $105.5 million. It had previously estimated an increase of $103.5 million to $104.5 million.

The percentage of business already booked with its retail partners is similar to that at the same time last year, Plank said. Direct-to-consumer sales, which includes Internet and retail stores, is growing faster than the rest of the business.

The company expects to make up 25 percent of sales growth in the back half of the year. The second half of the year is also traditionally a bigger earnings time because it is when the company introduces new products.

New products this year include a fleece line for the holidays and a looser-fit cold gear line.

Thomas Shaw, an analyst with Stifel Nicolaus, said his one concern is that the new products will cost more. "We know the brand is strong, but when you start talking about $50, $60 or $70 purchases, it becomes a tougher buying proposition for the consumer," Shaw said. "But so far the brand seems to be winning."

Several initiatives Under Armour put in place to get excess inventory under control - including opening more outlet stores- have also started to work, company officials said. The 43 percent inventory growth was a deceleration from previous quarters, said Brad Dickerson, Under Armour chief financial officer. He said inventory will be in line with sales growth by the end of the third quarter and lower than sales growth by the fourth quarter.

"We continue to anticipate incremental improvement in the inventory growth rates as we move through the year," Dickerson said.


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