Under Armour Reaffirms Commitment to Footwear

NEW YORK — Although its footwear sales slowed in the second quarter, Under Armour Inc. remains committed to the category, and last week identified adjustments it will make to the business in the coming quarters.

“If there is any message that I’ll send out today, it’s that Under Armour is in the footwear business, and we are going to be here for a very long time,” company CEO and Chairman Kevin Plank said on a conference call following its second-quarter earnings report.

“We took a fairly aggressive approach to the running footwear market in year one,” he continued, “and now that we are here, we have a better understanding of the things we did right and some opportunities to improve. There is a learning curve associated with any new business. The key for us as always is that we learn quickly, we adapt, we correct and we move forward.”

Executives at the Baltimore-based firm noted three ways it will improve on its running shoe business, which launched in January: sharpen the footwear’s price-value offering, address its seasonal forecasting and improve its technology.

“Athletic specialty, as a whole, was a new category for us, and we are a new brand to a lot of these [consumers],” said Plank. He noted that Under Armour’s running shoe opening price point of $90 might have been too high in a sporting-goods industry where “the meat of the business is a few dollars below that — actually, more than $10 below that.”

As evidence of its commitment, the company pointed to its recent hiring of Gene McCarthy, a former Timberland, Reebok and Jordan executive, as its new head of footwear, as well as the expansion of its footwear team and offices.

“Footwear will get better as time progresses,” said Thomas Shaw, an analyst with Stifel Nicolas. “The launch [of running shoes] has done well enough to give [Under Armour] confidence about the long term, but they’ve learned things that can make the category better.”

For the second quarter, footwear lagged behind apparel, as revenues from the category fell 18 percent to $37.5 million. Apparel sales grew 17 percent to $112 million, and total sales equaled $164.6 million, up 5 percent from the year-ago period.

Under Armour execs said that apparel and footwear liquidation, particularly in the running-shoe business, could impact its second-half margins. “We wanted to make sure we were as clean as possible going into 2010,” said Brad Dickerson, CFO.

Full-year diluted earnings for the company are expected to range from 80 cents to 82 cents a share, while sales should total $810 million.

“I’m shocked at how conservative their outlook is,” said Michael Binetti, an equity analyst at UBS Investment Bank. “It lowers the visibility for next year. I didn’t hear anything on the conference call that gives me the confidence that [Under Armour] can reaccelerate to the consensus estimate of 18 percent growth in 2010.”

But, Binetti added, “They’re building a business to last and not making short-term decisions. A lot of their growth has to come from footwear, and there is evidence that it’s a longer process than what some people expected.”

Under Armour last week reported a 5 percent increase in second-quarter earnings of $1.44 million, or 3 cents a share, 5 cents above consensus estimates among analysts polled by Yahoo Finance. That compares with earnings of $1.38 million, or 3 cents a share, in the second quarter last year.

For the first half of the year, Under Armour’s net income grew 27 percent to $5.4 million, or 11 cents a diluted share, versus $4.2 million, or 8 cents, in the first half of 2008. Sales increased by 16 percent to $364.6 million, from $314 million last year.

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