Wednesday, October 31, 2007

Under Armour (NYSE:UA): Yesterday's run overdone?

- Citigroup has some interesting comments on Under Armour (NYSE:UA) following yesterday's earnings release and guidance.

Management increased full year 2007 guidance due to the fact the company beat expectations by $0.06 today. However, it is important to note, based on the new guidance, EPS guidance is only increasing $0.04-$0.05, which implies fourth quarter will be slower than previously guided.
More concerning is the fact that inventories increased 102% to $151 million, even though sales in Q3 were up only 46% and mgt is guiding Q4 sales to be up around 30%. Mgmt spent a lot of time on the call explaining the increase, stating higher inventories reflect planned investment in core inventory to meet anticipated demand since the company was not able to meet demand for certain cold weather gear after a cold snap last year. However, the firm does not believe sell through at retail has been robust during September and October, which could mean retailers have significant inventory to work through before it can re-order for the rest of the winter.

Citi's 2007 estimates reflect the high end of management's guidance; however, they think there could be some risk to the top line if sales slow either based on continued warm weather and/or worsening macro economic trends.

Based on the slight reduction in Q4 guidance and the increase in inventories, they think the run up in the stock yesterday was overdone. They think the stock could be more attractive around the low $50's (all things in the story remaining equal). Maintains Hold rating and $66 price target.

Notablecalls: Generally, I view it as a red flag when managements start blaming the weatherman for their woes. Sure, some impact from the warm weather patterns to Q4 guidance was expected but the big increase in inventories does raise more questions.

By the way, Citi's not the only one calling yesterday's move overdone. CIBC's Sujata Shekar is out this AM noting UA shares moved to nearly $64 on the strong results, or about 48x their FY08 EPS est. The stock may have gotten slightly ahead of itself, in firm's view, with expected EPS growth topping out at 40% in FY07 and going to 33% in FY08. CIBC would wait on the sidelines for now. Maintains SP rating.

Keep in mind that there's a 20%+ short interest in UA, so I'm not sure one should put out a short line based on these comments. One to keep on the radar, though.

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