Stifel Nicolaus upgraded Under Armour and Crocs to “Buy,” lowered Fitbit to “Sell” and lifted its price target on Nike.
For Under Armour, Jim Duffy, the lead analyst, wrote in a note that the key to a rebound in the stock next year is cost structure management and evidence that North America has “returned to a healthy pull-market.”
Inventory clearance and “unsightly optics,” including multiple quarters of sales decline in the U.S. market, are expected to present ongoing challenges in the first half of 2018. But healthy inventory positions likely by the second half should put Under Armour in a “much improved position” entering 2019. Duffy wrote, “With evidence of improving sales quality and cost structure management, we expect the stock begins to anticipate structural capacity for margin improvement before it shows in reported results.”
While international and footwear both have the potential for sizeable growth in the years ahead, Duffy is more interested in seeing the margin benefits from a return to full-price selling at retail, the benefits of expense management and margin improvement programs and tighter management of inventory.
Wrote Duffy, “At approximately $5 billion in sales with approximately 3 percent operating margins, the business is meaningfully under-performing the structural margin potential of low double digits. With better inventory management, innovation, and deliberate and disciplined segmentation, we expect the business can stabilize and show gross margin improvement.”
Stifel Nicolaus’ price target on Under Armour was increased to $17 from $12.
For Crocs, Duffy expects the first half of 2018 will see the company show enough core growth to offset the impact of continued store closings. Wrote Duffy, “We are encouraged by strategic direction but also favorably impressed (if not surprised) by recent indications of brand relevance in North America. In combination with growth opportunities in Europe, China and Korea, we have more confidence in 2018 revenue potential.”
Added Duffy, “In combination with currency tailwinds to gross margin and improving visibility to SG&A progress, we view consensus EBITDA estimates as too conservative.”
Stifel Nicolaus raised its FY18 EBITDA estimates on Crocs to $84 million from $78 million. The consensus target is $77 million. For fiscal 2019, the EBITDA estimate was raised to $131 million from $120 million compares with Wall Street’s’ consensus of $104 million. The price target on Crocs was increased from $8 to $14.
Duffy reduced his rating on Fitbit to “Sell” with a $6 target price on his feeling that a return to mid-teens revenue growth in 2018 will be necessary for the company to achieve break-even operating margins. Duffy added in a note to clients, “Holiday season uptake suggests this is a high hurdle.”
He added any gains from sales of full-featured devices such as its new smartwatch will have to make up for “waning demand for fitness trackers” and the company will face tougher comparisons in the second half. Concluded Duffy, “With the stock market near all-time highs, no visibility to monetization of healthcare opportunities, and no opportunity for FIT to benefit from corporate tax reform, we cannot advocate owning FIT shares.”
For Nike, which reports its second-quarter earnings on December 21, Duffy maintained his “Buy” rating on the stock and raised his price target to $74 from $66.
Duffy expects Nike to meet the investment firm’s Q2 expectations of $8.42 billion in revenues and 49 cents a share in earnings and “demonstrate early progress” on its “triple-double” objectives designed to position the company for mid-teen earnings growth in the years ahead. He said the investment focus has shifted to fiscal 2019’s earnings potential with a bet on a North America turnaround as well as the benefits from the World Cup, foreign-exchange tailwinds and easier comparisons against this year’s restructuring activities.
In the near term, the analyst wrote that while Nike still faces challenges in the wholesale marketplace in North America, recent point of sale data shows Nike gaining momentum in $100 plus platforms at the expense of Adidas. U.S. channel inventories have also been managed tightly by retailers, and “consumer appetite for Nike premium platforms could set the stage for a return to sales growth in holiday or the important tax return selling season.”
With its emphasis as well as on international and direct, “we see Nike building a more convincing case for achievement of LT financial objectives.”
Overall, Duffy put out an industry update on the “Sports and Lifestyle Brands” he covers that pointed to some improving underlying trends. He noted that the arrival of cold weather in key seasonal markets and overall improving retail sales is supporting a healthier marketplace in the fourth quarter for the industry compared to the first three quarters of the year. Next year should benefit from leaner overall inventory positions across the industry and fewer bankruptcies.
Duffy wrote, however, that the challenges from structural shift, including rapid growth in online selling, will continue.
“We expect additional retail door closures and continued pressure on retail store traffic render domestic growth still challenging,” Duffy wrote. “In 2018 a psychological lift to consumer spending from tax reform is a potential benefit though the more tangible impact from consumer spending power is unlikely until 2019.”
Given the challenges with U.S. growth, Stifel Nicolaus is favoring companies in the space with balance sheet flexibility to support acquisitions or stock buybacks, those with the capacity to lift margins in a likely challenging growth environment, and firms with more exposure to European and Asian markets.
“In contrast to North America, European and Asian markets are not overstored and under-going retail square footage rationalization,” wrote Duffy. “While ecommerce is gaining share, store traffic remains healthy and consumer appetite for sports and lifestyle branded goods remains buoyant in both Europe and Asia entering 2018. Multi-nationals with specific growth drivers can grow topline from overseas markets and many will see margin benefit from currency as the year unfolds.”
Photo courtesy Under Armour