Is Under Armour Looking a Little Too Hot Heading Into Earnings?

Is Under Armour Looking a Little Too Hot Heading Into Earnings?

On Thursday, Jan. 30, Under Armour is due to report earnings for its fourth quarter of 2013. Leading into earnings, shareholders appear to be optimistic about the company's prospects, as demonstrated by shares trading at a lofty 57.6 times 2013's expected earnings. Is investors' enthusiasm misplaced, and is the company about to collapse the way industry peer Lululemon Athletica did earlier this month?

What Mr. Market expects from Under Armour
For the quarter, analysts expect Under Armour's management to report revenue of $619.9 million. If accurate, this would mean that revenue grew 22.6% compared to the $505.9 million the company reported in the same quarter a year ago. On a full-year basis, hitting this revenue estimate would mean that the company's consolidated revenue for 2013 will come in at approximately $2.3 billion, 24% higher than the $1.8 billion reported for 2012.

Looking at earnings per share, Mr. Market is a little less optimistic. While the company's revenue is expected to rise significantly, analysts believe that earnings for the quarter will come in at $0.53. At this level, the company's bottom line will have only expanded by 12.8% compared to the $0.47 Under Amour reported in the fourth quarter of 2012.

On a fiscal-year basis, the picture is looking slightly better. In the event that management does report earnings per share that match analyst expectations, the company's 2013 earnings will come in at $1.44, 19% higher than 2012's $1.21.

But can Under Armour please Mr. Market?
Expecting something is one thing, but actually getting it is another. And while it's impossible to predict with certainty how well a company like Under Armour will perform ahead of time, looking at the past can give you a general idea of how strong the company's performance has been.

Over the past four years, Under Armour's management has grown revenue by an impressive 114.3% from $856.4 million to $1.8 billion. According to the company's 2012 annual report, the primary sales driver has stemmed from a growing interest in the company's brands, rising prices, and greater direct-to-consumer sales.

As Under Armour's revenue has increased, so too has its net income. Over the past four years, the company's net income rose 175.2% from $46.8 million to $128.8 million. This has been largely due to an increase in the company's revenue but can also be attributed to costs falling as a percentage of sales. Over the same time frame, Under Armour's cost of goods sold stayed level at 52.1% of sales, but its selling, general, and administrative expenses fell from 37.9% of sales to 36.5%.

How does Under Armour stack up against its peers?
Compared to rivals like Lululemon and Gap , Under Armour's results have been strong but in the middle of the road. Over the past four years, revenue at Lululemon rose an impressive 202.6% from $452.9 million to about $1.4 billion. In its most recent annual report, Lululemon reported that its revenue has risen as a result of rising comparable-store sales and higher store count.

For instance, in 2012 alone, the company reported that it opened an additional 37 stores, bringing its total store count to 211. In addition to more stores in operation, Lululemon cited a 16% jump in comparable-store sales between 2011 and 2012.

In terms of net income, the situation at Lululemon has been even better. Over the past four years, management has been able to grow the company's bottom line by a jaw-dropping 364.2% from $58.3 million to $270.6 million. The reason for the rapid increase in the company's profitability can be chalked up partially to a rise in revenue, but is also attributable to significant cost reductions. Over this time frame, the company's cost of goods sold has fallen from 50.7% of sales to 44.3%, while its selling, general, and administrative expenses have inched down from 30.1% of sales to 28.2%.

On the other side of the room we have Gap. While Lululemon has successfully outperformed Under Armour over the past four years, Under Armour has outperformed its larger rival, Gap. Between 2009 and 2012, revenue at Gap increased by 10.2% from $14.2 billion to $15.7 billion.

In terms of net income, the situation at Gap has fared even worse, with net income rising only 3% over the past four years. Despite rising revenue, the business has been negatively affected by rising costs.

Over this time frame, management reported that the company's cost of goods sold has risen from 59.7% of sales to 60.6%. This was partially offset by a 0.5% reduction in selling, general, and administrative expenses relative to sales, but the company has also been negatively affected by rising interest payments because of the drawdown of a $1.2 billion credit facility.

Foolish takeaway
Historically, Under Armour's performance has been very strong, though not quite as strong as rival Lululemon. Moving forward, it's easy to assume that the company will continue its growth and profitability, but this would be a dangerous assumption. Earlier this month, Lululemon's shares fell significantly after announcing that both revenue and earnings would likely come in lower than management originally anticipated.

Although no such news has broke concerning Under Armour, there is risk in basing an investment decision solely on the past. Rather, the Foolish investor would be wise to use the past as a guidepost for successful investing. Another valuable indicator that should be considered is valuation, as measured by a company's price/earnings ratio. At 57.6 times expected earnings, Under Armour looks incredibly expensive, with or without its growth prospects.

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Daniel Jones has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica and Under Armour. The Motley Fool owns shares of Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published