Under Armour Is Lagging Behind Peers Like Nike & Lululemon! Analyst Explains Why

Under Armour, Inc. UAA shares are trading mildly higher on Friday.

Yesterday, the company reported a fourth-quarter revenue decline of 4.9% year-on-year to $1.33 billion. Shares started plunging after the company declared gloomy guidance. 

JP Morgan analyst Matthew R. Boss downgraded the stock to Underweight from Neutral, lowering the forecast to $6 from $8.

The analyst highlights CEO Plank’s comments that indicate a “reset” in the North American business into FY25, including an anticipated revenue decline of -15% to -17% year over year, particularly in the direct-to-consumer e-commerce channel to improve quality of sales.

As a result, FY25 operating income is anticipated to decline by 55% year over year.

According to the analyst, Under Armour is lagging behind peers in terms of the following:

1. Product innovation & newness (with lead times of up to 18 months to drive critical mass in launch product).
2. Profitability with Under Armour’s margin profile is now more than 1,000bps below global sportswear peers.
3. DTC infrastructure with mgmt is taking action to reset the e-commerce channel, while DTC stores remain 90% outlet with SG&A a continued constraint to growth investments. 

The analyst notes that Under Armour has donated 20 bps of global sportswear market share from 2019-23, relative to Nike, Inc. NKE

market share gains of +120 bps and Lululemon Athletica Inc.LULU +110bps, according to Euromonitor data, with Under Armour’s critical mass of new innovation ahead not to come for another 18 months.

Telsey Advisory Group analyst Cristina Fernández reiterated the Market Perform rating, lowering the forecast to $7 from $8.

The analyst highlights the company’s aggressive (and painful) moves that are needed to return to a premium apparel brand.

The path won’t be easy nor quick and involves reducing the company’s SKU count by 25% over the next 18 months, primarily in the “good” price tier; sitewide promotional days by 50% in FY25; and costs via layoffs and less usage of consultants and outside experts.

The company will also likely need to reduce or cut exposure to mass market retailers in favor of more premium distribution. 

Over time, these changes likely result in a smaller but healthier brand, at which time the company can focus on bringing to market more impactful product and marketing campaigns to drive growth in a profitable manner, the analyst writes. 

Fernández now models FY25 EPS of $0.23, down from $0.60 (FS at $0.53), with a revenue decline of 10.2%.

BMO Capital Markets analyst Simeon Siegel reiterated the Outperform rating on Under Armour, lowering the forecast to $10 from $12.

According to the analyst, Under Armour was one of the main COVID-19 beneficiaries, utilizing a “COVID-19 Cover” to refashion its business for the future as it focused on elevating its brand and cutting inefficiencies as it built up its cash balance. 

According to the analyst, the company represents one of the few brands to emerge stronger from the pandemic.

However, the analyst lowered FY25 earnings estimate to $0.24 from $0.60.

Price Action: UAA shares are trading higher by 0.97% to $6.78 at last check Friday. 

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