Under Armour Clears The Bar, Some Still Waving Red Flags

Commenting on Under Armour Inc (NYSE:UAA)'s first-quarter results, Wells Fargo Securities said the company cleared the low bar, although it cautioned that red flags still abound.

Q1 Print

Analysts Tom Nikic and Ike Boruchow noted the company's first-quarter sales and earnings per share surprisingly surpassed estimates. The analysts also pointed to the earnings call that was far more positive than in recent quarters.

Main Metrics

• Bottom Line: Loss of $0.01 per share (the first quarterly loss as a public company), narrower than the consensus loss estimate of $0.04 per share.
• North American Revenues: Down 1 percent versus Wells Fargo's forecast of a 3-percent drop, as new distribution at Kohl's Corporation (NYSE:KSS) was more than offset by retailer bankruptcies.
• International expansion: Strong, up 57 percent at constant currency versus firm's forecast of 55 percent).
• Apparel: Flat sequentially and up 7 percent year-over-year versus expectations for flat growth.
• Footwear: Growth slowed to 2 percent from 35-percent growth in Q4 versus forecast of 20-percent growth.
• Wholesale revenue: Rose 4 percent, slowing from 5 percent in Q4.
• DTC revenues: Rose 13.5 percent.
• Gross margin: Fell 70 basis point versus guidance for a 100-basis-point decline.
• SG&A: Deleveraged 210 basis points.
• Inventories: Up 8 percent, marginally higher than planned Q2 sales growth.

Red Flags Abound

Wells Fargo Securities delved into the reasons for exercising caution:

1. The 7-percent revenue growth, despite beating expectations, still represents a 500 points sequential deceleration (following a 10-point deceleration in Q4) and marks the company's slowest growth outside the 2008-2009 recession.
2. Footwear slowed to just 2-percent growth from 35 percent in Q4 despite a much easier compare, with the disappointing sell-throughs of the Curry 3 basketball sneaker being well documented.
3. Direct-to-Consumer growth slowed by 10 points from Q4 to 13.5 percent despite 24-percent store growth.
4. Fiscal-year guidance is predicated on a tough Q2 (EBIT roughly $45 million lower year-over-year) followed by a high hurdle for the second half (revenues up mid-teens, with a remarkably rapid acceleration, implied for footwear).

"We still think there are significant issues for UA to work through (shifting consumer preferences, stiffening competition, tough N.A. apparel/wholesale markets, etc.)," the firm said.

The firm raised its 2017 earnings per share estimate to $0.44 from $0.42, while its 2018 earnings per share estimate is at $0.52.

Remain Sidelined

Wells Fargo Securities has a Market Perform rating on the shares of the company, while it raised its valuation range to $18–$20 from $16–$18, based on 35–38 times its 2018 earnings per share estimate of $0.52.

"UA is a strong and under-penetrated brand in a robust global athletic market, but top-line trends are decelerating, which is also putting pressure on margins," the firm added.

"The company operates in an increasingly competitive athletic apparel industry, and they need to make significant investments to re-accelerate growth."

As such, the firm said it remain sidelined.

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