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The Science of Hitting
The Science of Hitting
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Under Armour: 'Exactly Where We Want to Be'

An update on Under Armour following 1st-quarter results

May 25, 2019 | About:

Earlier this month, Under Armour (UA)(UAA) reported financial results for the first quarter of fiscal 2019. Revenues increased 2% to $1.4 billion (up 3% in constant currencies). Growth in the quarter was in the Wholesale business (up 5% to $818 million), with Direct-to-Consumer (DTC) revenues declining 6% to $331 million. In the quarter, DTC accounted for 27% of Under Armour’s revenues.

North America struggled as expected, with revenues falling 3% year-over-year. This remains well below the high-single digit growth that Nike (NKE) has reported in the region in recent quarters (Adidas (ADS) reported 3% sales growth in North America in its most recent quarter). With that said, you can argue that the decline for Under Armour was healthy, driven by lower sales in the off-price channel and less promotional activity in the DTC business (wholesale revenues in the region actually grew slightly in the quarter). The decline in North America was offset by mid-teens constant currency International revenue growth (up 17%), led by strength in Asia Pacific.

Footwear revenues in the quarter increased high-single digits, reflecting strength in running. As COO Patrik Frisk noted on the call, the company is making notable strides here:

“The HOVR Infinite running shoe was featured as the top pick by both Outside and Women’s Running magazines. Runner’s World featured the shoe on the cover of its spring 2019 shoe guide with the coveted Recommended Award … HOVR is creating opportunities for our run business with accelerating visibility and considerations seen across price points... Having gone from just two HOVR run styles last year to five today and more to come this year, our aperture is opening to include highly technical runners, an accomplishment we’re particularly proud of.”

Against the 2% increase in revenues, inventories declined by more than 20%. This reflects the company’s continued efforts to both rationalize SKU’s (down roughly 50% over the past two years) and to effectively segment product offerings by channel. As noted on the call, the significant improvement in the company’s inventory position “allows us and our customers to ensure that our newest products are available at the right place at the right time, whenever and wherever consumers choose to engage Under Armour.”

For the year, management expects revenues to increase low-single digits to roughly $5.4 billion, with operating income climbing to roughly $225 million. By my math, that leads to net income of roughly $140 million – and diluted earnings per share of 30 to 35. The question that remains to be answered is whether the company can take operating margins back to the levels they consistently reported from 2004 to 2015. If they can, 2019 earnings are not be reflective of Under Armour’s earnings power.

Looking out further, management recently guided to a 40% earnings per share CAGR over the next five years. Off the 2018 results, that gets you to roughly $1.3 per share in 2023. Relative to the current stock price, that’s a price-to-earnings multiple north of 15 times 2023 earnings. Said differently, you must believe management will execute to own the stock here. For what it’s worth, Under Armour missed their 2013 Investor Day targets by a wide margin; it wouldn’t surprise me if they approached the most recent Investor Day guidance with a dose of conservatism.

Conclusion

As I noted when I wrote about Under Armour back in February, momentum is on their side. They business is on firmer footing than it was a year or two ago. The company is ready to play offense again.

But as always in investing, the question is what that means relative to the current valuation. I think the risk-reward is less attractive today than it was 18 months ago.

At this point, I have a hard time arguing UA is undervalued at $21 per share. They still have work to do on their turnaround (as Patrik noted on the call, they’re still earning trust back with Dick’s Sporting Goods (DKS) and other key retailer partners). In addition, Nike and Adidas show no signs of slowing down. For that reason, I decided to exit the remainder of my position a few months ago. Hopefully, Mr. Market gets jittery like he has in the past and pushes the stock back down. I’ll be ready to act if he does.

Disclosure: None. 

About the author:

The Science of Hitting
I'm a value investor with a long-term focus. My goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach is "patience followed by pretty aggressive conduct." I run a concentrated portfolio - a handful of equities account for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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