Under Armour Investors Sweat the Small Stuff

Under Armour
Under Armour

It looks like consumers really needed Under Armour's (UA) sweat-wicking apparel, judging by the company's recently reported results. But investors who own shares still might feel the need to sweat the results.

Under Armour blew past analysts' sales estimates for the quarter, reporting revenue of $291.3 million versus the consensus of $273.4 million. That translated into a 77% surge in net income to $6.2 million, or $0.12 per share. Analysts had expected $0.08 per share.

Even better, the company upped its annual sales forecast. Management now sees sales coming in at $1.42 billion to $1.44 billion for the year, compared with its previous range of $1.37 billion to $1.39 billion.

The company's direct-to-consumer business had a notable performance, with sales up 81%. That unit includes its online division as well as the Under Armour specialty stores and outlets. The company's apparel unit notched a sales gain of 36.3%.

While those performances looked good, the company actually burned cash in the quarter as it poured money back into its inventory.

Under Armour's Overstuffed Closet

Ballooning inventory has been an ongoing concern for the company, and this quarter looks no different.

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Investors need to keep a sharp eye on this trend. Persistently high inventories could force the company to mark down merchandise in order to move it, resulting in lower gross margin and profitability.

A couple other high-performing peers are having very different issues. Rivals such as lululemon athletica (LULU) have seen sales growing much faster than inventory, leading to shortages. The company responded by reducing its promotional activity, leading to higher margins. And Nike (NKE) has done well maintaining its inventory and provides investors insight into its business with reports on future orders by geography.

If Under Armour can hammer out its own inventory issues, the company should continue to shine. But with shares up nearly 100% over the last year and priced at 42 times this year's earnings, any stumbles will likely punish the stock. If that happens, even Under Armour's performance apparel might not be able to wick the sweat away fast enough from investors' brows.

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Motley Fool analyst Jim Royal does not own shares of any company mentioned here. The Motley Fool owns shares of Under Armour.