In a note Tuesday, Baird Equity Research Analyst Jonathan Komp rated Under Armour and Planet Fitness as his top two 2022 ideas as investor sentiment is expected to focus on “visible cyclical earnings recovery prospects.” Baird upgraded Under Armour to “Outperform” while downgrading Wolverine World Wide and Columbia Sportswear.
The Under Armour upgrade is tied to traction gained by Under Armour’s transformation actions aimed at improving full-priced selling in North America, emphasizing direct-to-consumer (DTC) and e-commerce and the re-investing in brand building activities in 2021. The analyst believes Under Armour has the potential to double EPS over the next three to four years.
Komp wrote, “While these actions have taken time to result in better brand fundamentals, we believe UA now is benefiting from improved sentiment among consumers (based on internal brand metrics of engagement/consideration).”
The analyst noted that Kohl’s and Academy Sports had made favorable comments on Under Armour’s progress on recent quarterly calls.
Factors bolstering Under Armour’s positive earnings outlook include management steps to pull back on discounting and reducing off-price to three percent of sales, strategically exiting about 3,000 lower-margin doors in North America and using a “more focused approach” to product innovation and go-to-market strategies that have shown positive signs for premium running footwear.
Komp wrote, “Based on these developments along with a greater emphasis on building the DTC/digital business, we believe UA is positioned to deliver sustained plus-mid-to-high single-digit annual revenue increases in F2023E which in turn should drive significant leverage amid an improved cost base and a return to low-teens operating margin or higher.”
Baird kept its price target on Under Armour at $32.
The Planet Fitness upgrade reflects the fitness chain’s “strong near-term cyclical recovery potential” in part due to healthy expected industry growth due to pent-up demand along with Planet Fitness’s increasing scale benefits to marketing and brand awareness, strong franchisee development trends and digitally-led customer acquisition and engagement.
Komp further wrote that Omicron risks “seem contained at this point” with Placer.ai foot traffic data, Google searches and Planet Fitness CEO CEO Chris Rondeaus media comments providing optimism around traffic and gym member signups tied to New Year’s resolutions.
Baird has a $110 price target on Planet Fitness.
The downgrades of Columbia and Wolverine to “Neutral” signals “a somewhat more selective approach” to stock picks tied to margin upside, according to Komp’s note.
On Wolverine, Komp holds an “optimistic view of the positioning of its brand portfolio,” citing third-quarter growth in the mid-single-digits for Merrell despite product delays, two-year growth over 60 percent for Saucony in the third quarter and Q3 growth over 50 percent for recently-acquired Sweaty Betty. The analyst also cited the benefit of the company’s heightened focus on driving direct and digital engagement under the leadership of Brendan Hoffman, the company’s former president who succeeded Blake Krueger as CEO at the close of 2021. Other positives include Wolverine’s exposure to active, outdoor, work consumer trends, and international expansion potential. However, earnings upside visibility remain limited amid inflationary pressures, including incremental airfreight in 2022. Baird lowered its price target on Wolverine to $33 from $45.
Komp wrote, “While we risk being too conservative with our revised target assumptions, we think in the absence of a sector re-rating higher, investors could show greater interest in other companies with stronger earnings recovery visibility in 2022E.”
On Columbia, positives cited include Columbia’s and Sorel’s brand positionings and management’s forecast made on its third-quarter analyst call for at least mid-teens revenue growth in 2022 supported by Spring order bookings running ahead more than 30 percent.
Komp nonetheless believes the stock will be held back by more limited visibility into earnings upside. He cited investor concerns over Columbia’s ability to sustain or expand operating margins “amid potential sources of reinvestment along with the need to maintain strong value proposition which could result in effective pricing below inflation.”
Baird lowered its price target on Columbia to $107 from $130.
Photos courtesy Under Armour, Planet Fitness
