Thursday, October 22, 2015

Under Armour - Accentuate the Positive

It is often amusing to see what companies highlight in their earnings reports and what they try to bury (or de-emphasis).  Today, Under Armour provided an excellent example of why it pays to read beyond just the bold print.

Here are the headlines and the sub-headlines at the top of Under Armour's Q3 earnings release

Under Armour Reports Third Quarter Net Revenues Growth Of 28%; Raises Full Year Outlook

- Third Quarter Net Revenues Increased 28% to $1.20 Billion, First Billion Dollar Quarter in Company's History

- Raises 2015 Net Revenues Outlook to Approximately $3.91 Billion (+27%)

- Updates 2015 Operating Income Outlook to Approximately $408 Million (+15%), Inclusive of the Impact of the Connected Fitness Acquisitions

Not bad, eh? Note all the positive words... "growth", "raises", "increased", etc

Later on in the release, is a section called "Balance Sheet Highlights"... a curious choice of words to be sure.  Here it is:
Cash and cash equivalents decreased 36% to $159 million at September 30, 2015 compared with $249 million at September 30, 2014.  Inventory at September 30, 2015 increased 36% to $867 million compared with $637 million at September 30, 2014.  Total debt increased to $905 million at September 30, 2015 compared with $192 million at September 30, 2014, primarily reflecting borrowing to fund the two Connected Fitness acquisitions. 
So cash is down, inventory is up, debt has exploded...  and these are HIGHLIGHTS.

Investors should also note that shares outstanding are up, diluting their ownership.  Cash flow from operations is hugely negative and getting worse. In the last 9 months, UA has reported ~$127 million in net income (be still my beating heart), while "burning" through over $1 billion in negative CFO, capex, and acquisitions.

It might be important for UA shares to remain in the stratosphere.  No surprise then that it is all onward and upward  according to Kevin Plank who stated in the release:
We are experiencing powerful brand momentum in 2015 and we continue to invest to capitalize on our success in the near-term while establishing the foundation for sustainable growth in the future.
Happy talk is great, but at a $20 billion market value, it pays to be skeptical here.  And don't just read the headlines.

Full Disclosure:  Short UA (now)

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