Under Armour's Endorsement Spending Could Hamper Top-, Bottom-Line Growth

The aggressive spending by Under Armour Inc UA on endorsements could weigh on its margins while setting a high bar for revenue growth, according to a recent note from Stifel.

The brokerage, which has a Hold rating on the stock, said Under Armour’s aggressive endorsement commitments in recent years “set a high bar for revenue growth and heighten the risk of material earnings power compression if sales growth slows, even modestly.”

Filings

The regulatory filings show that the athletic footwear maker spent $127 million in year one commitments and $858 million in total commitments in 2015. But, this year, the company is investing heavily on endorsements, potentially leading to the greatest percentage increase in sponsorship commitments with the next 10K filing.

“Assuming 25 percent revenue and 40 percent endorsement growth fueled by recent and anticipated commitments, we estimate a 190bps headwind from endorsement commitments over five years (from 2.6 percent to 4.5 percent of sales),” analyst Jim Duffy wrote in a note.

Further, the analyst noted that endorsement obligations could result in 360bps deleverage and pressure margins, assuming 40 percent endorsement growth and 17.5 percent revenue growth.

As such, Duffy believes the company’s top-line growth prospects are balanced against imminent margin pressure, primarily driven by heavy endorsement spending. The analyst also cut the price target to $28 from $33.

At last check, shares of Under Armour had risen 2.61 percent on the day to trade at $31.40.