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Footwear Growing Pains Plague Under Armour

Analysts concerned about next year.

BOSTON — Under Armour’s third-quarter report showed further proof that the firm has a long way to go in footwear.

Though the Baltimore-based company revealed slightly higher quarterly profits that exceeded analysts’ estimates last Tuesday — and raised its yearly guidance — shares of the company pulled back after its projection implied a weaker-than-expected fourth quarter and analysts became less optimistic on its 2010 prospects.

“I don’t think [footwear] has been as explosive as I thought it would be. It seems like each new piece, at best, replaces declines in some of the other older [footwear categories]. They’re still making baseball, football and running [shoes], but it hasn’t been incremental growth on top of incremental growth,” Sean McGowan, managing director of equity research at Needham & Co., told Footwear News. (Footwear sales for the quarter climbed 153 percent to $33 million.)

Shares of Under Armour ended trading last Tuesday at $29.27, down $3.82, or 11.5 percent. The stock declined another 12.8 percent in Wednesday trading.

McGowan said the stock’s decline is likely due to several factors: the firm’s weaker-than-expected full-year 2010 outlook; Wall Street’s anticipation that Under Armour will not debut a new basketball shoe next year as planned; and the firm’s acknowledgment that footwear revenues are not expected to grow next year. Further, McGowan estimates profits could rise around 10 percent next year, well below the 20 percent analysts and investors have come to expect from Under Armour.

“Maybe the [basketball] product is not ready, but I’m not the only one who expected them to have growth in footwear next year,” said McGowan, who downgraded Under Armour shares to “underperform” from “hold.” “It’s an area where they’re still learning the ropes and figuring out where the point of differentiation is, and they want to make sure they have product that’s superior. I’m bullish on 2011.”

Under Armour raised its full-year 2009 earnings guidance to between 85 cents and 87 cents a share on revenue of $830 million to $835 million, up from 80 cents to 82 cents on sales of approximately $810 million.

But for Stifel Nicolaus retail analyst Thomas Shaw, the firm’s guidance implies a fourth-quarter profit of between 23 cents and 24 cents a share, which came in lower than Wall Street’s projection last week for 28 cents a share.

Further, Shaw said in a report, “We believe full-year 2010 is being positioned more as a transition year as Under Armour recalibrates the running shoe message, price, technology, takes a measured approach to new footwear categories and continues to invest in product development and the fast-growing, margin-rich direct business.”

Christopher Svezia at Susquehanna Financial Group, meanwhile, has turned his sights to Under Armour’s footwear potential in 2011.

“While we had previously looked for slightly improved fiscal-year 2010 footwear margins — given improved sourcing and product development — we now believe margins will remain pressured at least through the first half of 2010, due to liquidations and a product mix skewed to lower-margin footwear. “

Under Armour said in its earnings report last Tuesday that increased footwear and apparel sales helped drive its net income up 2 percent to $26.2 million, or 52 cents a diluted share, for the quarter ended Sept. 30. Net sales jumped 16 percent to $269.5 million. Wall Street had anticipated EPS of 44 cents on sales of $249.9 million.

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