Thursday, March 27, 2008

Inventory Builds at Under Armour, a sign of future growth or potential write-offs?

Inventory DOS (Days of Supply) is a commonly used indicator in the retail industry often anticipating future sales increases for the firm. Under Armour, Inc. (UA), designs, develops, markets, and distributes performance apparel, footwear, and accessories for men, women, and youth primarily in the United States and Canada.


When looking at the historical inventory supply of UA, you will notice that this trend has recently been increasing in the last few quarters, from 121 days at March 30th, 2007 filing to 171 days at December 31st, 2007. This 41% increase in inventory is not uncommon to UA, seeing that they experienced similar increases last year. But what is puzzling is that, this recent build is lasting longer then the previous year, us a "seasonality" claim to explain the movement. Below is the seasonality excerpt from the UA SEC filing:


            "Historically, we have recognized approximately 70% to 75% of our income from operations in the last two quarters of the year, driven by increased sales volume of our products during the fall selling season, reflecting our historical strength in fall sports, and the seasonality of our higher priced ColdGear® line. Approximately 61% and 62% of our net revenues were generated during the last two quarters of 2006 and 2005, respectively. The level of our working capital reflects the seasonality and growth in our business. We generally expect inventory, accounts payable and accrued expenses to be higher in the second and third quarters in preparation for the fall selling season. Nonetheless, the high percentage of income from operations and net revenues in the second half of the year may have been in part due to our significant growth in net revenues."


Being told that this inventory build is due to the seasonality, when comparing it to a competitor, Nike (NKE), you will see that UA is not managing the inventory as tightly as NKE. [Exhibit 1]

 This growing variance is also the main contributor to the difference in the total cash cycle between the two firms. [Exhibit 2]


In comparison to one of its competitors, this inventory build is slightly concerning and I would tread carefully with these UA shares…


Disclosure: Author does not own any shares of UA of NKE.

1 comment:


Its about time to sell Armour. Seems to me like sports clothing tastes can change on a dime. The stocks had a good run.