Under Armour Down But Not Out; Analyst Sticks With Outperform Rating

Baird retained its Outperform rating on Under Armour Inc UA UAA shares, despite a weak fourth-quarter report and outlook, saying these are only temporary disruptions and not deterioration of brand fundamentals.

Analyst Commentary

Under Armour earned $0.23 per share in the fourth quarter on revenue of $1.3 billion, lower than Street view of $0.25/$1.41 billion. Under Armour expects 2017 total revenue to grow between 11 and 12 percent to $5.4 billion versus consensus estimate of $4.93 billion. The company also sees gross margin to be "slight down" compared to 2016.

“While sentiment is likely to remain low near term (7+ competitor downgrades...) we think expectations now reflect a low point for sales growth, profitability, and ROIC,” analyst Jonathan Komp wrote in a note.

Justification

Komp’s bullish thesis on Under Armour is based on the following factors:

• “The Q4/Q1 North America sporting goods disruptions (lingering impacts from bankruptcies, aggressive competitor discounting) should normalize by 2H17, or sooner.”
• “UA’s brand fundamentals remain healthy, and there’s meaningful whitespace across geographies, categories, and channels (Kohl’s likely highly incremental).”
• “Footwear remains strong, with Q4 performance (+36.4 percent despite less favorable Curry checks year-over-year) a bullish long-term sign that growth drivers are broadening (UA still selling <10% the pairs of Nike).”
• “International momentum has sustained (up 50+ percent again in 2017; >20 percent mix; still <10% the size of Nike), and profitability has inflected (aided by China strength).”
• “UA now appears committed to pursuing efficiencies within SG&A and capex, which could enhance operating leverage when sales improve, support improved FCF, and drive a bottoming of ROIC in 2017.”

Meanwhile, Komp sees sharp rebound of 44 percent in 2018 EPS at $0.60 assuming revenue growth of 18.6 percent and slight margin normalization.

Shares of Under Armour closed Tuesday’s trading at $21.49. Komp cut his price target to $25 from $35.