Moody’s Investors Service affirmed Under Armour, Inc.’s Baa3 senior unsecured rating. The rating outlook remains negative.
“The affirmation reflects our expectation for sequential improvement in operating performance and credit metrics over the next 12-18 months as the company advances through the last year of its multi-year transformation plan,” stated Moody’s apparel analyst, Mike Zuccaro. “The company has made significant progress in adjusting its cost structure, reducing inventories and improving gross margins, and international sales growth remains strong. However, North American sales are expected to be realtively flat in 2019, and the company plans to reinvest much of the SG+A cost savings into higher return marketing plans and key areas of the business such as international expansion, direct to consumer, digital, innovation and footwear. While creating some drag on near-term profit improvement, these investments make strategic sense and will further strengthen the company’s brand and competitive position in the global market over the longer term.”
Outlook Actions:
..Issuer: Under Armour, Inc.
….Outlook, Remains Negative
Affirmations:
..Issuer: Under Armour, Inc.
….Senior Unsecured Regular Bond/Debenture, Affirmed Baa3
….Senior Unsecured Shelf, Affirmed (P)Baa3
RATINGS RATIONALE
Under Armour’s Baa3 rating reflects the company’s strong competitive position as a leading developer, marketer and distributor of branded performance apparel, footwear and accessories in the U.S. and internationally. The rating also considers the company’s track record of innovation, which drove strong revenue and earnings growth for an extended period of time, as well as Moody’s positive view of the global sporting goods market, including apparel and footwear, which provides credible organic growth opportunities, particularly in international markets where the company is significantly underpenetrated. In addition, through its “Connected Fitness” platform, the company has a sizeable digital health and fitness community that, while being a relatively modest revenue contributor, should be a strong catalyst for growth and consumer engagement over time given consumer’s shifting preference towards digital and more personal shopping experiences. The company’s conservative financial policy is also a key rating consideration, given that it has maintained moderate leverage in the face of rapid growth.
The rating is constrained by Under Armour’s reliance on a single brand and limited product diversity, along with nascent, but expanding, geographic reach. These risks expose the company to economic cyclicality and inherent changes in consumer preferences in a concentrated region, as evidenced by the recent challenges in the North American market, which accounted for around 74 percent of trailing twelve-month net revenue.
The negative outlook reflects the challenges the company faces in stabilizing its North American market and balancing investment with improved profitability and credit metrics.
The rating could be downgraded if Under Armour fails to sustain sequential improvement in operating performance, particularly overall profit margins and credit metrics. A downgrade could also stem from failure to generate positive free cash flow or more aggressive financial policies, such as through shareholder returns or acquisitions. Specific metrics include debt to EBITDA sustained near 4.0x or EBITA to Interest well below 4.0x.
Given the negative ratings outlook, a ratings upgrade is unlikely at this time. To stabilize the outlook, Under Armour would need to demonstrate sequential improvement in operating profit and credit metrics. For the ratings to be upgraded, Under Armour would need to resume growth in its key North American market and maintain overall operating margins at least in the high single digit range. Quantitatively ratings could be upgraded if lease-adjusted debt/EBITDA was sustained below 3.0 times and interest coverage above 5.0x.
