Under Armour 2006 Annual Report Download - page 18

Our profitability may decline as a result of increasing pressure on margins.
Our industry is subject to significant pricing pressure caused by many factors, including intense
competition, consolidation in the retail industry, pressure from retailers to reduce the costs of products and
changes in consumer demand. These factors may cause us to reduce our prices to retailers and consumers, which
could cause our gross margin to decline if we are unable to offset price reductions with comparable reductions in
our operating costs. If our gross margin declines and we fail to sufficiently reduce our cost of goods sold or grow
our net revenues, our profitability will decline, and we could incur operating losses that we may be unable to
fund or sustain for extended periods of time, if at all. This could have a material adverse effect on our results of
operations, liquidity and financial condition.
A decline in sales to, or the loss of, one or more of our key customers could result in a material loss of
revenues and negatively impact our prospects for growth.
In 2006, approximately 37% of our net revenues were generated from sales to our two largest customers in
alphabetical order, Dick’s Sporting Goods and The Sports Authority. The percentage of our net revenues
attributable to these customers has increased in recent years as these customers opened new store locations and
devoted an increased portion of their floor space to our products. We expect this trend to continue in 2007.
However, we currently do not enter into long-term sales contracts with these or our other key customers, relying
instead on our relationships with these customers and on our position in the marketplace. As a result, we face the
risk that one or more of these key customers may not increase their business with us as we expect, or may
significantly decrease their business with us or terminate their relationship with us. The failure to increase our
sales to these customers as we anticipate would have a negative impact on our growth prospects and any decrease
or loss of these key customers’ business could result in a material decrease in our net revenues and net income.
We are incurring increased costs and risks associated with complying with increasing and new regulation
of corporate governance and disclosure standards.
We completed our initial public offering in November 2005. We have spent and continue to spend a
significant amount of management time and external resources to comply with laws, regulations and standards
relating to corporate governance and public disclosure, including under the Sarbanes-Oxley Act of 2002
(“SOX”), new SEC regulations and stock exchange rules. Our management team has limited experience
operating a public reporting company. As a result, we will likely need to continue to improve our financial and
management controls and our reporting systems and procedures.
Section 404 of SOX requires management’s annual review and evaluation of our internal control over
financial reporting and attestations of the effectiveness of these controls by our management and by our
independent registered public accounting firm. We completed our first Section 404 report in early 2007. We
expect to continue to enhance our internal controls. However, there is no guarantee that these efforts will result in
management assurance or an attestation by our independent registered public accounting firm that internal
control over financial reporting is adequate in future periods. In the event that our Chief Executive Officer, Chief
Financial Officer or independent registered public accounting firm determines that our control over financial
reporting are not effective as required by Section 404 of SOX, investor perceptions of us may be adversely
affected. In addition, our overhead may increase and our net income may decline as a percentage of net revenues
as a result of the additional costs associated with complying with the complex legal regime associated with being
a public reporting company.
Sales of performance products may not continue to grow and this could adversely impact our ability to
grow our business.
We believe that continued growth in industry-wide sales of performance products will be largely dependent
on consumers continuing to transition from traditional alternatives, such as basic cotton T-shirts, to performance
products. If consumers are not convinced that performance products are a better choice than traditional
10