Moody’s Investors Service upgraded Under Armour, Inc.’s debt ratings due to better-than-expected revenue and earnings growth.
The ratings upgraded included its corporate family rating (“CFR”) to Ba2 from Ba3, probability of default rating to Ba2-PD from Ba3-PD, and unsecured notes to Ba3 from B1. The company’s speculative grade liquidity rating is unchanged at SGL-1, reflecting very good liquidity. The outlook remains positive.
“The CFR upgrade and positive outlook reflect Under Armour’s revenue and earnings growth that exceeded Moody’s previous expectations, when combined with continued solid free cash flow and debt reduction, resulted in significant improvement in its credit metrics over the past year,” stated Mike Zuccaro, Moody’s vice president.
Moody’s said Under Armour has taken significant action to improve overall brand health and profitability, particularly in North America, its largest market, which had faced significant challenges before the onset of the pandemic.
“With improved profitability, a much stronger balance sheet and very good liquidity, the company is well-positioned to weather the lingering effects of the pandemic, including current disruptions throughout the global apparel industry supply chain,” added Zuccaro.
Ratings Rationale
Moody’s said, “Under Armour’s Ba2 CFR reflects governance considerations including conservative financial strategies with a track record of debt reduction and maintaining moderate financial leverage. The rating also reflects its well-known brand and solid competitive position in branded performance apparel, footwear and accessories in the U.S. and internationally. Also considered are the company’s track record of innovation and Moody’s positive view of the global sports apparel market, which provides credible longer-term organic growth opportunities, particularly in international markets where the company is significantly underpenetrated.
“Under Armour is constrained by its reliance on a single brand and limited geographic reach, which exposes the company to economic cyclicality and inherent changes in consumer preferences in a concentrated region. This is evidenced by recent challenges in its largest market, North America. Under Armour has taken significant action over the past several years to improve its operations, which has resulted in improved profit margins. While operating margins have significantly improved over the past year, they remain weak relative to other similarly rated apparel peers, and it will take additional time to prove that turnaround efforts will have a sustained positive effect.
“Environmental, social and governance factors are considered in Under Armour’s credit profile. As an apparel company, Under Armour faces industry challenges in sourcing products from third-party manufacturers in various countries. The global coronavirus outbreak is also viewed as a key social risk, given the substantial implications for public health and safety. With respect to governance, Moody’s expects the company to maintain conservative financial policies and moderate leverage, consistent with its longer-term track record. Also, the company recently paid a $9 million civil monetary penalty as part of an SEC settlement regarding company disclosures related to certain pull-forward sales between the third quarter of 2015 and the fourth quarter of 2016, neither admitting nor denying the SEC’s findings. The company previously stated that there have been no additional requests from the DOJ since the second quarter of 2020 and that it does not currently anticipate additional engagement with the DOJ relating to this matter.
“Under Armour’s SGL-1 speculative grade liquidity rating reflects Moody’s expectation for very good liquidity, supported by $1.25 billion of unrestricted cash on the balance sheet as of September 2021, full availability under its unrated $1.1 billion revolver, positive free cash flow, and ample covenant headroom. The positive outlook reflects Moody’s view that despite near-term challenges related to global supply chain disruptions, continued execution of the company’s operating initiatives sales recovery and stronger profitability will result in sustained improvement in credit metrics and continued very good liquidity.”
Photo courtesy Under Armour
