Despite Beat, Morgan Stanley Is Skeptical On Under Armour's Stock

• The share price of Under Armour Inc UA has declined 14.08 percent over the past six months, to a low of $67.36 on January 26.
• Morgan Stanley’s Jay Sole has maintained an Underweight rating on the company, with a price target of $64.
• Despite positive headlines, Sole believes certain balance sheet and income statement items suggest issues exist for the company.

Analyst Jay Sole mentioned there were five data points that were causes for concern. Firstly, U.S. women’s apparel is expected to have grown only 8 percent, in line with Morgan Stanley’s bearish view and reflecting deceleration of 800 bps quarter on quarter.

Under Armour has guided to a decline in gross margins in 1Q by 150 bps year on year, as compared to the consensus forecast of flat gross margins.

In addition, Sole noted that “UA had lower 4Q incentive compensation, suggesting the company may have missed some internal benchmark,” while inventory increased 46 percent, which is 1700 bps more than the sales growth in 1Q.

Related Link: Under Armour Surges Following Q4 Earnings, Beat, Guidance

On the other hand, accounts receivable rose 55 percent, 2400 bps ahead of the 4Q sales growth.

“This is a 3000 bps difference vs. UA's LTavg. AR is $76 million above trend. Removing this amount from 4Q sales would have meant UA’s top-line growth missed by 300 bps instead of beating by 500,” Sole explained.