Brean Cuts Under Armour Targets: Here's Why

• Under Armour Inc UA shares are down 8 percent in the last one month, from a high of $105.70 on September 25.
• Brean Capital’s Eric Tracy maintained a Buy rating on the company, while reducing the price target from $117 to $110.
• Expected drag on 4Q margins and questions around the COO/CFO transition could exert pressure on the company’s shares in the near-term, Tracy mentioned.

Under Armour reported 3Q revenue upside, driven by a ramp in Footwear. The company recorded 61 percent growth in Footwear in 3Q, which has resulted in some natural build of product.

Under Armour would need to liquidate this build, choosing to aggressively clear through product in 4Q. This could exert pressure on the company’s 4Q gross margins, analyst Eric Tracy said and projected a 100bps contraction in the quarter.

Tracy commented, “Inventory was up +36% exiting 3Q, not unexpected given accelerating growth. Given our belief that sell-in for Spring '16 footwear is strong, we are not overly concerned with liquidation event (likely one qtr drag), but note fw/int'l dilution will continue to drag on GM until scaled (likely not inflecting until FY17/18).”

The EPS estimate for 4Q has been reduced from $0.53 to $0.47 to reflect footwear liquidation and the resulting GM pressure. The EPS estimates for FY16 and FY17 have been reduced from $1.41 to $1.33 and from $1.75 to $1.68, respectively.

Investors are focusing on the succession plan, following news of the departure of Under Armour’s CFO and COO Brad Dickerson. Tracy added that although there are strong candidates, the key would be to find a cultural fit and the candidate would have “big shoes to fill” in view of “Dickerson's relationship/credibility both internally and externally.”

Although the long-term fundamentals remain positive, Tracy mentioned that shares may be under pressure in the near-term while the market digests the GM drags and there are uncertainties around the COO/CFO transition. Moreover, there is a lack of near-term fundamental catalysts.