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Under Armour sales: no sweat

The Baltimore Sun

Under Armour's appeal is such that people are still springing for $55 compression shirts in the middle of a recession. But even that loyalty may have its limits.

The Baltimore sports apparel company announced continued growth in third-quarter sales and profit yesterday even as consumers cut back on most spending. Most importantly, it managed to maintain a gross profit margin of more than 50 percent, meaning that shoppers are still willing to pay full price for its merchandise. The average selling price of its product grew in the "single digits" during the quarter, according to the company.

Third-quarter sales growth was driven some by earlier orders placed by retailers. But analysts said that Under Armour has also developed a certain cachet that makes people want the product even in bad times.

"People still want brands that resonate or brands that have a lot of momentum," said Thomas D. Shaw, an analyst with Stifel Nicolaus. "Under Armour's message to that core athlete hasn't changed. That core athlete is going to continue to play sports year-round. And as they play, they still want that product that helps them perform the best, and Under Armour has emerged as the clear-cut leader and destination brand."

But the company, known for sportswear that wicks sweat from the body, isn't so sure it can avoid the economic fallout much longer. Yesterday it lowered its forecasts for the rest of the year, saying orders for some of its products weren't as high as the company had expected. Some retailers have even canceled orders.

"We had an unbelievable third quarter," said Wayne Marino, Under Armour chief operating officer, in a phone interview. "It's very recently that we started to see certain indicators drop."

Under Armour reported net income of $25.7 million, or 51 cents per share, in the third quarter, compared with $20 million, or 40 cents per share, the same period a year ago. Analysts expected a profit of 50 cents per share.

Revenue increased 24.1 percent to $231.9 million. Income from operations increased 37.5 percent to $46.5 million.

The company reported gross margins of 51 percent. Inventory grew, but at a slower rate than sales. Under Armour has been selling excess product through 25 outlet stores.

Pleased with the performance, Wall Street sent the company's shares soaring 26 percent yesterday, or 4.77, to close at $22.88 on the New York Stock Exchange.

"On a day when consumer confidence fell to its lowest level ever, to the surprise of many, Under Armour posted a solid quarter in this difficult environment," Omar Saad, an analyst with Credit Suisse, wrote in a report.

But Under Armour is also facing the same slowdown in consumer spending as most retailers.

"At the end of the day, it's a highly discretionary purchase," Shaw said about Under Armour products. "If it gets tough enough and a person bought the Under Armour product last year, they're going to see if they can stretch it through another year's wear."

Marino said the company decided to lower its outlook for the year after noticing declining traffic in some stores that carry its merchandise and the way retailers were managing their inventory.

The company will look at ways to cut costs, such as reducing travel and having executives take smaller bonuses, Under Armour CFO Brad Dickerson said in a conference call with analysts.

"We understand the challenges in the environment, and we will answer those challenges with greater discipline around the management of the business," Dickerson said.

The company lowered its revenue estimate to a range of $750 million to $760 million, assuming a growth rate of 24 percent to 26 percent. It had predicted revenue of $765 million to $775 million.

It also lowered its guidance for operating income to a range of $97.5 million to $104.5 million. It had expected $104.5 million to $105.5 million.

But analysts and marketing experts said that Under Armour has a brand that will be able to expand even in tough times.

"We know the consumer environment is terrible and unlikely to improve any time soon, but we also believe that there will be retail companies that innovate, grow and take market share even in the worst of times, and Under Armour is one of these," Saad wrote in his report.

The company plans to introduce a running shoe next year, and it recently announced that Foot Locker would begin selling its merchandise, making it more visible in malls.

"The brand is very strong, and they may be experiencing some effects of a down economy," said Howe Burch, executive vice president at TBC advertising firm in Baltimore who once worked for Reebok and Fila. "But those are purely external factors that do not have anything to do with strength of the brand."

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