"Is Under Armour stock a buy? Earning results are in and they are considerably better than what we expected with improved e-commerce and better margins "
By: Allan R Kirby
Under Armour (NYSE: UA)(NYSE: UAA) has had a tough time over the last few quarters and although we believe this is still a turnaround story, we find that the company is finally making progress and looks more attractive as an investment.
Troubles abound with Under Armour?
In our last review, we highlighted the disappointing performance shown by the stock as well as the company itself with issues such as shrinking popularity of the brand, falling sales, high inventory, and Federal authorities investigating Under Armour Inc.’s accounting practices. This was a company that was in a multi-year transition to get sales and growth going again when the pandemic hit. However, looking at what happened recently we are starting to see the company is turning a page and looks much more compelling as an investment.
"See our last review of Under Armour: Stocks to Buy: Is Under Armour (UA, UAA, a great athletic apparel stock for you.)"
What Happened with UAA?
The latest quarter was much better than what was expected, Under Armour (UAA) had both earnings per share and revenue beat. Q3 Non-GAAP EPS of $0.26 beating expectations by $0.23, while GAAP EPS of $0.09 beats by $0.06.
Looking at revenues, Under Armour had Revenues of $1.43B, which was basically flat year over year but they still beat expectations by $270M. Gross Margins held up well at 47.9% vs. 46% consensus.
CEO update: "Our third-quarter results reflect considerably better than expected performance due to higher demand and our strong execution, especially in North America... We believe that the critical mass of our transformational challenges is behind us, and we remain sharply focused on operational improvements and financial discipline to accelerate strategies to create sustainable, long-term growth for the Under Armour brand and our shareholders."
Under Armours' Fiscal 2020 Outlook
Due to ongoing uncertainty related to COVID-19 and its potential effect on global markets, the company expects material impacts on its business results for the remainder of 2020 and into 2021. Key points related to Under Armour's full-year 2020 outlook include:
Revenue is expected to be down at a high-teen percentage rate compared to 2019 results, reflecting a low twenties percentage rate decline in North America and a high-single-digit percentage rate decline within the international business. For the fourth quarter, the company now expects revenue to be down at a low-teen percentage rate, versus the previous down 20 to 25 percent expectation, impacted by the following factors:
Expected year-end timing impacts from COVID-19, related to customer order flow and changes in supply chain timing resulting in more planned spring product deliveries in early 2021 versus late 2020.
An anticipated substantial decline in licensing revenue due to lower contractual royalty minimums and contract settlements realized in the prior year.
Lower planned excess inventory sales to the off-price channel.
Gross margin is expected to be up 20 to 40 basis points versus 2019 due to channel mix benefits and supply chain efficiencies, offset mainly by discounting related to COVID-19. For the fourth quarter, the company anticipates meaningful gross margin pressure primarily related to expectations around a more promotional environment relative to the prior year.
Operating loss is expected to reach approximately $800 million to $860 million. Excluding the impact of restructuring and impairment charges, adjusted operating loss is expected to reach approximately $140 million to $150 million.
Adjusted interest and other expense net is planned at approximately $55 million.
Adjusted diluted loss per share is expected to be in the range of $0.47 to $0.49.
Inventory is expected to be up approximately 10 percent at the end of 2020.
Capital expenditures are planned at approximately $80 million compared to $144 million in 2019.
There was a lot to like from this quarter compared to last quarter. First, their direct-to-consumer revenue increased 17 percent to $540 million, driven by continued strong growth in eCommerce, which grew by about 50%. This is important because Direct to Consumer is much more profitable than its wholesale business which they plan to exit from between 2,000 and 3,000 wholesale partnerships in the next few years. Secondly Patrik Frisk recently mentioned on CNBC that Under Armour is able to convert more sales with shoppers, this is very encouraging in our view.
Under Armour's first basketball sneaker designed specifically for women, which hit the shelves back in September 2020 shows the sportswear maker is improving on their product mix and this is a great step forward. Although sales for women sports shoes are only about 1% of sales, this is still an example of the company looking to find ways to grow and expand their products.
Under Armour announced that it will be selling MyFitnessPal to investment firm Francisco Partners for $345 million. This is actually net positive as they got a decent price even though they acquired it for $475 million close to six years ago. The company also announced that it will be winding down the Endomondo platform which it also acquired at the same time for $85 million. However, the MapMyFitness platform, which includes MapMyRun and MapMyRide, remains a crucial element of Under Armour's digital strategy, as does its connected footwear business. Clearly Under Armour felt this is the best course of action for the long term by exiting non-core businesses. We like the overall transaction and keeping the MapMyFitness platform shows they have fine-tuned their connect strategy.
Analyst Changing Minds
Stifel has announced that they are more constructive on Under Armour (UA, UAA) after seeing balance sheet improvements and another underlying improvement. The firm has upgraded the stock to a Buy from a Hold. Additionally, Stifel is also increasing its price target from $11 to $17. Some of the reasons include Greater confidence stems from improved quality of revenue, sightlines to revenue inflection in 2021, gross margin drivers from the mix, and a streamlined expense base pointing to an opportunity for earnings leverage.
Under Armour Stock Upgrade
Over the last few weeks we have seen more positive news with Under Armour (UA, UAA) from Analysists, for example, A Deutsche Bank analyst upgraded the company to a buy from a hold and set their target price to $22. If Under Armours upcoming earning release on Feb 16, 2021, shows margin expansion, sales growth as well as expense control, you will see additional upgrades and stock appreciation.
Is Under Armour in trouble? Under Armour is a turnaround story and still needs to improve and refocus more on athletic leisure. However over the past year, Under Armour seems to have finally start taking the right steps to build its brand back up.
Is Under Armour stock a buy?
In our last review, we felt this was a stock that you could start a small position in, but it was at best just a hold. Today we are starting to see real improvements with margins, revenue mix, and ongoing improvements in their direct to consumer revenues. However, although we have seen improvements we still believe this is a longer-term turnaround story but it's a much more compelling story since Q2.
So is Under Armour stock a buy? Under Armour's stock is not considered overpriced but is unlikely to see any significant appreciation in the coming months. The story has improved since Q2 and looks like a stock that could be added to your portfolio. Potential investors should take the time, do research, and see for themselves if this is a stock to add to their portfolio.
Apparel Stocks to Buy
There are other highly rated ESG consumer discretionary stocks that are doing well in this current environment such as Levi Strauss & Co. (LEVI) and Tapestry (TPR). These may be other stocks to take a look at.
What is the difference between UA and UAA:
UA is Under Armour Inc's Class C shares which do not have voting rights while UAA Under Armour Inc Class A do have voting rights. Generally speaking, voting shares such as UAA will have a higher stock price than a nonvoting share. You are paying the premium to have voting rights.
Disclosure: mysmallbank.com nor the author received any compensation from any securities highlighted in this article. The article is our opinion only and is written to help readers learn more about the stocks mentioned in this article. Consider this as basic information only and utilize professional services and additional sources before making an investment decision.