<span style="color: #a3a2a2;">Stifel upgraded its rating on Under Armour to “Buy” from “Hold” due to the investment firm’s increased confidence in the company’s expense-structure leverage and ability to achieve more than mid-single-digit EBIT margin on a “higher-quality” revenue base.
In the note, Jim Duffy, Stifel’s lead analyst in the space, wrote that Under Armour’s better-than-expected third-quarter revenue results at a better margin is an encouraging sign.
“Athletic is a bright spot category in the industry, and the sales outlook above prevailing estimates for 4Q despite at negative 9 percentage-point headwinds from timing shifts suggests a more favorable ramp towards underlying sales growth than previously anticipated,” said Duffy.
As reported, Under Armour on October 30 reported revenue in the third quarter ended September 30 was flat at $1.4 billion. Wall Street’s consensus target had been $1.16 billion and Under Armour had expected sales to decline in the range of 20 to 25 percent.
Adjusted net income was $118 million, or 26 cents a share, well above Wall Street’s consensus target of 3 cents. The earnings beat was attributed to the faster-than-expected sales recovery and “significantly better than expected” merchandise margins due to considerably less discounting and markdowns than initially anticipated.
<span style="color: #a3a2a2;">Going forward, UA said it expects fourth-quarter revenue to decline at a low-teen percentage rate, far better than management’s prior expectations for declines in the range of 20 percent to 25 percent. Later-than-typical spring deliveries that will land in early 2021 versus late 2020 is expected to negatively impact growth by 9 percent. Looking further ahead, Under Armour said it’s on track to post “slightly positive” EPS in 2021.
In his note, Duffy wrote that the third quarter was particularly encouraging due to the evidence of “improving quality” of sales. He said e-commerce sales reportedly grew in excess of 50 percent following the July roll-out of a new website. He noted that sales to off-price channels are expected to be reduced to 4 percent of revenue for FY20, which was at the lower end of Under Armour’s previously disclosed range.
Under Armour also indicated it plans to exit between 2,000 to 3,000 undifferentiated accounts in North America “over the next couple of years” that should not only support a premium positioning for the brand but ultimately benefit gross margins.
Duffy believes a “deepening partnership” with Kohl’s will help offset lost volume from smaller accounts. He estimates Kohl’s recent announcement of a goal to expand its active mix to 30 percent of sales from 20 percent should create an approximately $1 billion North America wholesale opportunity “spread across beneficiary brands.”
From a balance sheet perspective, the divesture of MyFitnessPal for $345 million in a sale is expected to streamline the business and result in a net cash position entering 2021 to reduce risk. “Simplification of the business enables focus on driving profitable growth,” wrote Duffy.
Beyond the exit of about 20 percent of the North American distribution base and the MyFitnessPal sale, other steps being taken to reduce complexity and support “quality core growth” include an ongoing SKU rationalization and its restructuring efforts designed to support $40 million to $60 million in annual expense reductions.
“Revenue inflection (we expect in 1H21), sales quality and cost savings bring a return to profitability into focus for FY21,” wrote Duffy. “The streamlined expense structure lowers the leverage point and suggests the capacity for profit inflection as the revenue base sustains growth into FY22.”
Stifel also raised its price target on Under Armour to $17 from $11. The stock closed at $14.77, up 31 cents, in over-the-counter trading on Tuesday.
Photo courtesy Under Armour
