Updated: Jun 3
"Inventory and Cost controls, eCommerce, and cutting back on wholesale are all helping Under Armour (UA, UAA) become a top branded performance stock again, so is it time to buy?"
By: Allan R. Kirby
Under Armour (NYSE: UA)(NYSE: UAA) is a multinational men's women and youth apparel, athletic shoes, and accessories company that has had a tough time over the last few years but we believe they have turned things around and are back on a path to success. Although the stock has appreciated in the last few months, there is still more room to run, especially if they continue to execute. Read more and see what you think.
Making the right moves?
On September 2, 2020, the Company’s Board of Directors approved an additional $75 million to the restructuring plan bringing the total to between $550 million to $600 million in estimated pre-tax restructuring and related charges. This restructuring as well as Inventory/Cost controls, eCommerce, and getting out of wholesale are all prudent steps that will help Under Armour to align the business to the new retail environment. Plus it will allow the company to position itself as a premium brand, with a profitable path to real growth.
Under Armour for example is moving forward with plans to sell more merchandise directly to consumers and reduce their reliance on wholesalers. Specifically, they plan to pull out of 2,000 to 3,000 partner stores, but they will still have 10,000 partners by the end of 2022. This is a smart move and one that has been highly successful with many premium brands because it's a way to effectively reduce discounts increases pricing as well as improves margins. In fact Under Armours' direct-to-consumer eCommerce sales increased by an impressive 25% in the last quarter while full-year growth in eCommerce was 40% and now represents 47 percent of total direct-to-consumer revenue.
Quarterly resuts were much better than anticipated with strong direct to consumer revenue increase as well as strong sales in the Asian markets.
Latest results (Q4 2020) of UA and UAA?
Before we make a conclusion we first need to see how the company did in its most recent Quarterly results:
Revenue: Down 3 percent to $1.4 billion, Additionally Wholesale revenue decreased 12 percent to $662 million while direct-to-consumer revenue increased 11 percent to $655 million, driven by 25 percent growth in eCommerce.
Gross margin: Increased 210 basis points to 49.4 percent compared to the prior year. Excluding the restructuring efforts, adjusted gross margin increased 300 basis points to 50.3 percent, driven primarily by benefits from channel mix, supply chain initiatives, and regional mix.
Selling, general & administrative expenses decreased 4 percent to $586 million, or 41.7 percent of revenue.
Restructuring and impairment charges were $52 million consisting of $50 million of restructuring and related impairment charges and $2 million of long-lived asset impairments.
Operating income was $56 million.
Adjusted operating income was $120 million.
Net income was $184 million.
Adjusted net income was $55 million.
Diluted earnings per share were $0.40. Adjusted diluted earnings per share were $0.12.
Inventory was relatively flat at $896 million.
Cash and Liquidity
The company ended the quarter with Cash and Cash Equivalents of $1.5 billion, including $199 million in net cash proceeds from the MyFitnessPal platform sale.
No borrowings were outstanding under the company's $1.1 billion revolving credit facility at the end of the fourth quarter.
Overall, it was a good quarter, nothing to be concerned about, the lower wholesale revenue was expected but eCommerce continued to grow and remained relatively strong. A relatively good cash balance and no net borrowings from their revolving credit leave the company with strong liquidity and an ability to continue to execute a path to real growth.
There was a lot of uncertainty with this stock even before the pandemic, so many investors decidedly bailed on Under Armour at the beginning of the pandemic back in March 2020. The reason was primarily the fact there was just too much uncertainty. However, it appears the company under Patrik Frisk has actually done a good job of quickly getting Under Armour back on track. The increase in direct-to-consumer sales, as well as more sales conversions with online shoppers, clearly shows he is on the right track. This bolds well for Under Armours stock, which has recovered from the March lows, and Fisk is keenly aware he needs to continue to improve the company as he recently commented; "As we continue to navigate uncertainty around the pandemic, we remain focused on execution and the efforts necessary to stabilize our business further and improve our ability to deliver sustainable shareholder value over the long-term."
Completed Sale of MyFitnessPal Platform
As previously announced on December 18, 2020, Under Armour completed the sale of the MyFitnessPal business to Francisco Partners for $345 million, inclusive of the achievement of potential earn-out payments. This was was good news as Under Armour received a reasonable price for the app which has 200 million users and enables them to track their diet and exercise. The company had acquired the app back in 2015 for US$475 million. Although MyFitnessPal is gone and its Endomondo fitness platform is being discontinued, they will still have the MapMyFitness, which includes MapMyRun and MapMyRide. Going forward the MapMyFitness and Under Armour's connected footwear will lead its digital strategy. The company said the sale was part of its ongoing transformation and "reduces the complexity of our consumer's brand journey."
As I had mentioned in my previous analysis 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's sports shoes are only about 1% of sales, this is still an example of the company looking to find ways to grow and expand its products.
"Piper Sandler upgrads Under Armour to overweight from neutral recently, many others have also upgraded the stock as well."
ESG Note: Under Armour has a Sustainability Council that meets regularly. This cross‐functional committee comprises senior and operationally responsible leaders, including their Chief Supply Chain Officer and leaders from Sourcing, Supply Chain, Materials Innovation, Digital, Licensing, and Legal. Under Armour also has key partnerships which include: Fair Labor Association (FLA), Sustainable Apparel Coalition (SAC), Since 2008, Under Armour, has been committed to working with the Environmental Defense Fund (EDF) Climate Corps. Under Armour does recognize the importance of better governance and sourcing of material as well as a commitment to the environment.
Is Under Armour stock a buy?
Under Armour has gone a long way to right itself and each quarter continues to bring good news. The stock is reflecting this as it has appreciated over 100% since the March 2020 lows. The company under Patrik Frisk still has a lot of work to do, however, the worst of its transformation is behind it and it can continue to improve sales and margins as well as continue to see stock appreciation.
So is Under Armour stock a buy? As we just mentioned Under Armour's stock is well off its lows but it still the potential to continue to appreciate if they continue to execute and provide strong growth. The story of Under Armour now looks compelling and could be considered a potential longer-term investment. We like the stock but potential investors should take the time, do research, and see for themselves if this is a stock to add to their portfolio.
Other Stocks and ETFs to look at:
There are other stocks and ETFs to look at such as the 3 top ESG Diversity Focused ETFs to buy You can also look at Ford Motor co. (F) or three UK financial stocks that have great value, Lloyds Bank (LYG), Natwest (NWG), and Barclays (BCS).
Previous analysis of Under Armour: Stocks to buy: Is it time to finally buy Under Armour UA and UAA
What is the difference between UA and UAA:
UA stock is Under Armour Inc's Class C shares which do not have voting rights while UAA stock is Under Armours' Inc Class A does 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.
Under Armour provides Military Discounts:
Under Armour North America does offer a 10% Military discount off your entire purchase for Active Duty, Retirees, Veterans, Military Spouses, Military Family Members. Best of all you can get discounts on clearance items as well. I find Under Armour has one of the better discounts available. All you need to do is to show your ID at the time of checkout.
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.