<span style="color: #999999;">Shares of Under Armour dropped $1.41, or 6.5 percent, to $20.44 Monday after J.P. Morgan resumed coverage of the company with a “neutral” rating and lowered its revenue estimates for fiscal 2020 on continued struggles in North America.
The firm’s price target was set at $23. Previously, J.P. Morgan had an “overweight” rating and a $28 price target prior to shifting to “not rated.”
In a note, Matt Boss, J.P. Morgan’s lead analyst, said that based on its recent fieldwork and discussions with Under Armour management, it sees Q4 sales rising 4.7 percent, below Wall Street’s consensus target of 5.6 percent. J.P. Morgan expects Q4 EPS to come at 10 cents, in line with Wall Street’s target.
For fiscal 2020, J.P. Morgan expects 3.8 percent revenue growth, below the Street’s consensus of 4.7 percent. The firm expects $298 million in EBIT, also below Street targets of $311 million.
Boss wrote, “Based on our recent work we see the cadence of North America revenue second-half weighted with sequential improvement in wholesale and new full-price store openings not sufficient to fill the hole from the continued reduction in off-price shipments activity…and potential ‘full-price hangover’ effect post-off-price availability.”
The analyst noted that Under Armour’s management anticipates the “sequential step-stone” improvement in North America with the performance in the second half better than the first half. The improvement will be helped by a step-up in product innovation in Spring 2020 combined with assortment changes with alignment by Fall/Winter 2020. Also expected to help is the launch of a holistic brand-focused marketing campaign in mid/late January 2020 that will replace prior campaigns that focused on specific product marketing.
Regardless, Boss expects North America revenues for Under Armour to be negative for the fourth consecutive year in 2020. J.P. Morgan noted that domestic brand interest as measured by Google Trends was unchanged over the past three months versus Q3 and remains “materially below” levels a year ago.
Despite numerous cost-saving initiatives, improvement in SG&A will also be constrained by the incremental spend to support the new branding campaign as well as the “dead rent” expense to support its planned New York City 5th Avenue flagship. Rent payments start in the second quarter of 2020 and the flagship is not expected to open until late 2021.
Boss said Under Armour’s gross margin targets appear “on track” as the firm continues to benefit from improved inventory management, supply chain initiatives, and favorable mix.
