Citigroup on Wednesday upgraded Under Armour on signs that its focus on profits is taking root and will pay off. The upgrade came a day after B. Riley reiterated its “Sell” rating on the stock as that firm’s annual brand survey found Under Armour losing ground to competitors.
In assuming coverage on Under Armour for Citigroup from Kate McShane, Paul Lejuez upgraded the stock to “Buy” from “Neutral” and lifted the firm’s price target to $29 from $23.
“Under Armour has grown up, with a renewed focus on driving profitability and return on invested capital,” wrote Lejuez in a note. “After chasing 20%+ top-line growth during the 2010-2016 period, Under Armour has taken actions that position the brand in a more healthy position within the still very attractive athletic landscape.”
The analyst eyes the potential for Under Armour to recapture 600 basis points or more in EBIT (earnings before interest and tax) margin over the next several years. Under Armour’s EBIT margin was 3.4 percent in 2018.
Lejuez also believes management was conservative with its 2019 gross margin guidance. Under Armour has projected gross margins for the year to improve approximately 60 to 80 basis points this year.
Lejuez was encouraged by the steps Under Armour is taking to adapt to changes in purchasing behavior around athletic apparel and believes the brand has ample potential for growth internationally. Finally, marketing pushes from Nike are expected to lift the overall athletic category to also benefit competitors such as Under Armour.
Lejuez wrote, “Nike is looking to grow the overall pie for the athletic apparel and footwear market globally, and we believe Under Armour will be one of the beneficiaries of increased participation in different forms of athletics.”
On Tuesday, Susan Anderson at B. Riley reiterated her “sell” rating and $12 price target on Under Armour after the investment firm’s annual athletic footwear/apparel survey showed that Under Armour fell in ranking among brands for the second year in a row.
Within footwear, Under Armour was ranked fifth in basketball by respondents (vs. four in 2018 and three in 2017), behind Reebok (ranked three) and Jordan (ranked four). Under Armour ranked six out of eight in running (vs. six in 2018 and four in 2017) and seven in casual (vs. six in 2018 and four in 2017).
The analyst believes the weak showing in footwear reflects “limited innovation” in footwear from Under Armour that’s currently focused on further iterations of the HOVR technology introduced in 2018 versus Adidas and particularly Nike. More casual/lifestyle oriented brands such as New Balance, Vans and Puma were also found to be showing gains.
In apparel, Under Armour once again ranked third in preference for 2019, behind Nike and Adidas, although Adidas extended its comparative lead slightly over last year. Additionally, Under Armour remained flat across the 18-to-34 age group in apparel while Adidas, Lululemon and Nike increased in ranking.
Riley said Google Trends showed flat international search interest for Under Armour among athletic brands. Positive search activity in Latin America offset negative search interest in Europe and Asia.
Finally, B. Riley’s most recent in-store checks at Dick’s Sporting Goods showed that Under Armour again lost shelf space in stores both sequentially and year-over-year across categories in men’s, women’s and kids.
Shares of Under Armour fell 79 cents Tuesday when B. Riley’s report came out but recovered 61 cents to close at $19.32 on Wednesday after Citi’s note arrived.
Citicorp’s Lejuez also initiated coverage on some other major stocks in the active lifestyle space:
- Coverage on Nike was initiated with a “Buy” rating and Citicorp’s price target raised to $100 from $96. Nike closed Wednesday at $84.08, up 60 cents. Lejuez wrote, “Nike’s deep pockets and unrivaled innovation pipeline should help them drive high-single digit constant currency growth and at least mid-teens earnings per share growth over the next several years.”
- Dick’s was kept at a “Neutral” rating but the price target was raised to $40 from $38. Dick’s closed Wednesday at $41.18, up 61 cents. Lejuez wrote, “Dick’s is facing declining traffic trends as more business moves online, which will likely continue to pressure EBIT margins. In addition, their largest brand partners each have initiatives in place to go more direct to the consumer, which could further pressure Dick’s traffic in years to come.”
- Citicorp’s rating on Foot Locker was reduced from “buy” to “neutral” and price target lowered from $72 to $68. Foot Locker closed Wednesday at $61.24, up 13 cents. The analyst wrote in the note, “While Foot Locker has tailwinds at its back in North America with comps inflecting positively in the fourth quarter, the company still faces many of the same headwinds as other specialty retailers (significant mall exposure; [margin] pressure from direct-to-consumer. And while Foot Locker has a strong partnership with Nike (which accounts for 66 percent of Foot Locker purchases), we believe Nike’s direct-to-consumer ambitions are a secular headwind.”
Photo courtesy Under Armour