Under Armour Shares Higher As Buckingham Upgrades To Buy

Although elevated promotions are currently exerting pressure on performance, Under Armour Inc UA is expected to generate margin expansion as prices stabilize and distribution expands, Buckingham Research Group’s Scott Krasik said in a report. He upgraded the rating for the company to Buy.

Krasik also raised the price target for the company from $44 to $48. The new price target implies 29 percent upside from current levels.

Decline In Promos

Currently, there are “unprecedented promos across athletic apparel and footwear,” mainly due to elevated inventory levels on account of the Sports Authority liquidation and a significant shift among consumers towards fashion athletic styles from performance ones.

Related Link: 4 Sports Failures In 2016: An Under Armour Curse?

Krasik expects Under Armour’s margins to begin improving from 4Q16, with the impact of promos being mitigated by favorable comps as well as new product launches that are more lifestyle driven.

Distribution Expansion

Under Armour has built a business worth more than $4 billion, mostly without expanding distribution partners. Over the next few years, the company can be expected to broaden its distribution “to more closely mirror” Nike Inc NKE [Rated: Buy, PT: $70]. The analyst expects Under Armour’s door count to increase by about 50 percent in the next two to three years.

Long-Term Value

Krasik estimates the company to generate sales and EPS CAGR of 21 percent and 37 percent, respectively. By FY21, footwear and international would each represent about 35 percent of Under Armour’s total sales. “We project UA will see better leverage on fixed COGS and SG&A as well as a lower tax rate from a more globally diversified business.”