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The Science of Hitting
The Science of Hitting
Articles (722) 

Under Armour: Are the Clouds Parting?

A look at the company's 2020 financial results

February 11, 2021 | About:

On Wednesday, Under Armour (NYSE:UA)(NYSE:UAA) reported results for the fourth quarter of fiscal 2020. For the quarter, revenues declined 3% year-over-year to $1.4 billion, with growth in International (+4% in constant currencies to $655 million) offset by a mid-single digit decline in North America (-6% to $924 million). On a channel basis, Wholesale declined 12% to $662 million, offset by double digit growth in direct to consumer (+11% to $655 million) on the back of 25% growth in eCommerce.

For the year, revenues declined by 15% to $4.5 billion, which reflects the significant headwinds that the business faced during the heart of the pandemic. The one bright spot for the business in 2020 was eCommerce, where revenues increased 25% to $850 million (accounting for roughly 20% of the company's total revenues for the year).

As shown below, despite a difficult couple of years as of late, Under Armour put up solid results for the decade, with revenues increasing at a 15% compounded annual growth rate (CAGR):

On a regional basis, North America had a noticeably difficult year, with revenues contracting in Under Armour's largest market by 20% to $2.95 billion. Latin America struggled as well (down 16% to $165 million), with EMEA and Asia-Pacific providing some cover for the weak results in the other regions (both down low-single digits). On a category basis, the weakness was widespread, with Apparel and Footwear revenues both declining mid-teens for the year (offset by some late strength in the Accessories category due to sales from the Sports Mask).

While 2020 was clearly difficult for Under Armour, I think we saw some encouraging signs for the future, particularly in the back half of the year. For example, the company has done a reasonable job managing its inventory position despite a meaningful (and rapid) decline in business volumes, with the year-end level of inventories comparable to 2019.

In addition, the balance sheet has strengthened (helped by the proceeds from the sale of MyFitnessPal), with the company now holding $1.5 billion in cash and equivalents ($500 million in net cash).

Finally, management has made continued efforts to "right size" the cost structure, making decisions that will ultimately remove supply from certain sales channels that had the potential to negatively impacting the perception of the brand, all of which put the company in a position to report profitable, healthy growth in the coming years.

Despite the headwind from the mid-teens decline in revenues, adjusted gross margin (percentage) increased by 170 basis points in 2020 to 48.6%, with the increase reflecting an improvement in channel mix (more DTC / eCommerce, less wholesale), as well as a small tailwind from regional mix (higher share of sales from APAC, the company's highest gross margin region).

Combined with the company's attempts to manage the cost structure (SG&A declined 3% to $2.2 billion), adjusted operating income was essentially zero for the year – and while that may not be a positive result in most circumstances, I'd say that's a pretty good outcome given where the company stood just six months ago.

As CEO Patrik Frisk noted on the call, now that the business has reset, the company is now in a position to start actively pursuing the strategy that they believe can deliver long-term success:

"Our efforts over the past couple of years to pursue a clearly defined target consumer, rebase our cost structure, and fundamentally change the way we work is beginning to yield results, empowered by a clear identity of who we are: a leading athletic performance brand. Our foundation is solid, our discipline tested and proven, and the opportunity before us is robust."

Looking ahead, management expects the business to return to growth in 2021, with revenues up high-single digits. In addition, they expect a return to profitability, with adjusted operating income of $130 million to $150 million. While that's a good start, it still leaves plenty of work to do as well: with 2021 expected revenues of roughly $4.9 billion, that implies an operating margins in the low-single digits – well below the double digit operating margin that the company aspires to attain over the long run (and notably, a goal they consistently hit from 2005 to 2015).

To achieve that objective, Under Armour needs to return to revenue growth. Looking at the company's product categories, Footwear is a notable area for improvement. After much success in the first half of the decade, the business is smaller today than it was when it first crossed $1 billion in annual revenues in 2016. The company will need to see better results with the Curry brand (basketball), as well as in other categories like running and cleats, if Footwear is going to once again be a real contributor to top-line growth at Under Armour.

Conclusion

I've owned Under Armour on and off over the past few years, with my buy and sell decisions guided by the expectations implied by Mr. Market. Simply put, I've bought the stock when I've had the chance to do so at a meaningful discount to the market multiple on normalized earnings (roughly 10 at times) and have sold when I believed too much optimism was priced in.

By my math, assuming roughly 10% growth over the next five years, Under Armour could reach $6.5 billion to $7.0 billion in annual revenues. If the company can once again achieve 10% operating margins, that's $650 million to $700 million in operating income (and a comparable number on pre-tax income given the current balance sheet positioning). Assuming a 20% effective tax rate, let's call it $600 million in net income.

At a current stock price of $19 per share, Under Armour's market cap is just shy of $9 billion. Personally, given the legwork that will be required to achieve these results, as well as the time value of money, I'm not salivating at the chance to pay roughly 15 times normalized future earnings (in 2025) for this business. At the same time, I don't consider that too outlandish.

If Mr. Market gives me the chance to buy this stock at roughly 10 times normalized future earnings (again), I'll take him up on the offer (again). Until then, barring new data points that lead me to believe UA's future will outpace the assumptions outlined above, I'm likely to remain on the sidelines.

Disclosure: None

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About the author:

The Science of Hitting
High-quality businesses for the long-term.

In the words of Charlie Munger, my approach is \"patience followed by pretty aggressive conduct.\" I run a concentrated portfolio, with the top five positions accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

Rating: 5.0/5 (3 votes)

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Comments

Praveen Chawla
Praveen Chawla premium member - 2 months ago

The stock has run up quite a bit from the bottom in April however it is still decent value if management can turn the ship around. Looks like the days of double-digit top-line growth is clearly over so a P/E 15 is OK only if they can get mid-single digit revenue growth.

According to GF, the company is decently capitalized with fairly low debt and lots of cash. The brand is well recognized. Now, what is the difference between the two classes of shares? Are they voting or non-voting or any other difference?

The Science of Hitting
The Science of Hitting - 1 month ago    Report SPAM

Praveen - That's correct, the Class C common is non-voting stock.

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