By Thomas J. Ryan
Earnings estimates on Under Armour were slashed by Wall Street in line with management’s guidance with many analysts significantly reducing their outlook for 2021 as well. To many analysts, Under Armour’s fourth-quarter underperformance and the dim outlook underscores the brand’s challenges reviving growth against formidable competitors in North America although a few remain confident the turnaround is only delayed.
As reported, Under Armour on Tuesday said it expected revenues to be down at a low-single-digit percentage in 2020, in large part due to a mid- to high-single-digit percentage decline now seen in North America. The guidance places revenue in the range of $5.11 billion to $5.21 billion, below Wall Street’s previous target of $5.51 billion. Wall Street was also expecting 1 percent year-over-year growth in North America.
EPS was projected to be in the range of 10 to 13 cents for 2020, which was well below Wall Street’s average target of 46 cents. The company’s fourth-quarter sales and earnings results also came in short of Wall Street’s targets, albeit to a lesser degree.
The reduced guidance in part reflects the loss of $50 to $60 million in sales in the first quarter in the APAC region due to the Coronavirus outbreak. Almost 600 branded Under Armour doors are currently closed in China. The soft outlook more broadly reflects ongoing challenges faced in its full-price wholesale and e-commerce businesses in North America.
Other news in the quarterly report was that Under Armour was considering additional restructuring activities that would cover in part the costs to forego its Fifth Avenue flagship in New York City.
Shares of Under Armour on Tuesday fell $3.86, or 18.9 percent, to $16.59.
Piper Sandler downgraded Under Armour to “Neutral” from “Overweight,” and reduced its price target to $19 from $27.
In a note, Erinn Murphy wrote that while her team was expecting lower-than-expected guidance for North America, “we did not expect the magnitude of the earnings cut.”
Her “Overweight” rating was particularly tied to Under Armour’s ability to return to double-digit EBIT margins as called for under the company’s existing five-year plan set in December 2018. Wrote Murphy, “We now expect a delay in the latter and are downgrading shares to Neutral, preferring to observe from the sidelines for now until we get better clarity on the pace of margin recovery going forward. We remain steadfast in our view that there have been significant strides in improving company culture, quickening the go-to-market strategy and strengthening product franchises and innovation.”
Murphy noted that Q1 sales are now forecasted down in the range of 13 to 15 percent with 500 basis points tied to the Coronavirus outbreak, another 500 basis points tied to lapping efforts to reduce sales to off-price channels and a 300 basis shift in delivery from Q1 into Q4. Other risks include the impact of the Coronavirus outbreak so far is only embedded in the first quarter, she noted.
On the North America recovery, Murphy wrote that while Under Armour’s product “is definitely improving from our perspective,” the company may not “get the opportunity to prove it in a material way if [Nike and Adidas] continue to execute well.”
Overall, Piper Sandler reduced its EPS estimate for the current year to 10 cents from 46 cents, and for 2021 to 22 cents from 62 cents.
Raymond James reiterated its “Strong Buy” rating while reducing its price target to $25 from $30.
“While we were disappointed in 4Q19 results, and more specifically in the guidance provided for FY20, we do believe that significant progress has been made at UAA over the last 2-to-3 years, and we acknowledge that turnarounds of this magnitude take time and can have fits and starts,” wrote analyst Matt McClintock.
Among the positives cited was continued gross margin improvement; a 23 percent reduction in inventory levels over the last two years despite 6 percent growth; significantly reduced sales to the off-price channel; and a vastly improved infrastructure as a result of the transformation efforts. Wrote McClintock, “We believe that UAA remains a rare commodity in that it is a strong brand with significant equity and recognition in an industry that historically allows for turnarounds (such turnaround examples in athletic include Reebok, Adidas, Nike, and Lululemon). While investors in the consumer/retail sector have a multitude of possible ‘turnaround’ stories to choose from, many of these situations are in structurally declining industries (i.e. department stores), whereas UAA operates in a significantly healthier space with higher barriers to entry, and one that is driven by innovation and marketing as opposed to simply fashion and price.”
Raymond James reduced its 2020 EPS estimate to 13 cents from 30 cents and its 2021 estimate to 30 cents from 69 cents. With the stock under pressure, McClintock said Under Armour’s valuation is now not far off prior lows on a price-to-sales basis, and is well below athletic peers.
Wrote McClintock, “We continue to believe management is doing the right things for the business long-term and that the brand has meaningful upside, but do acknowledge that investors will not likely give the company a free pass and will need to see more concrete evidence of the turn in North America sales. We do not foresee such a catalyst for the first half of FY20 but see an opportunity for improving trends and inflection in 2H20.”
Susquehanna Financial Group reiterated its “Sell” rating with a $14 price target.
Analyst Sam Poser wrote in a note that Q419 results and disappointing FY20 guidance reinforce his team’s contention that a return to sustainable top-line growth is at least a year away. He also expects long-term, five-year financial targets from December 2018 will be revised downward in the near future.
Poser’s primary concerns are that Under Armour will struggle to regain market share and shelf space in North America from competitors. Wrote Poser, “While our checks indicate that the apparel business in Kohl’s and the men’s business at Dick’s may be stabilizing, we reiterate our contention that Under Armour cannot compete with Nike, Adidas and Puma. UAA’s biggest problem in North America is creating, as UAA management put it, brand consideration.”
He also feels Under Armour will be unable to reaccelerate revenue growth in China once the headwinds from the Coronavirus dissipate and will also struggle to develop compelling products that can challenge larger competitors. Poser stated, “New product platforms such as HOVR, Curry, The Rock, and others are failing to drive excitement to the levels management expects, as evidenced by the lack of momentum in North America.”
The analyst also still believe the brand remains too focused on performance product and uncertainty around an ongoing accounting scandal adds risks.
On the positive side, Poser sees the potential move to close its 5th Avenue NYC flagship store as “a prudent decision,” with press reports indicating the annual rent is $30 million a year. Poser also believes the revamped management team has a more realistic assessment of the company’s prospects. Poser wrote, “While the outlook for a turnaround remains murky, the new senior management appears more aware of UAA’s current position in the marketplace, and the challenges facing the company than prior senior management.”
Stifel reiterated its “Buy” rating while reducing its price target to $20 from $27. Wrote analyst Jim Duffy, “Disappointing FY20 guidance overshadows ongoing operational progress and balance sheet improvement.” He nonetheless wrote that the revenue inflection in North America is “proving elusive” and the resulting SG&A deleverage “will weigh heavily on profitability.”
On the upside, the international growth outlook remains encouraging, but improving margins will be linked to resuming growth in North America and likely further restructuring activities. Wrote Duffy, “We believe brand equity is firming and strategically, we support the commitment to quality of sales and increased full-price selling. With this, we expect North America’s revenue can rebase in 2020 to establish a foundation for growth.”
Duffy stated that at Under Armour’s current valuation, “we believe shares don’t appropriately reflect this potential.”
Cowen reiterated its “Market Perform” rating while trimming its price target to $15 from $17.
John Kernan wrote in a note, “UAA faces a difficult position in North America as it focuses its brand positioning on athletic performance (The Focused Performer) and continues to lack a full-price lifestyle component that is boosting peers.”
The analyst further said North America revenues “continue to deteriorate at an increasing pace in both wholesale and direct-to-consumer and the company’s cost structure is not aligned with its revenue profile while competition like Nike, Adidas, Lululemon, Puma, and others are increasing both SG&A and CAPEX. The revenue growth for the business is being generated in a lower margin and uncertain international market further highlighting risks.”
International operating margin is currently 10 percent versus North America at 20 percent, he noted.
Kernan further wrote that the potential use of $300 million to $400 million of cash restructuring charges poses additional headwinds to Under Armour’s financial model. Kernan wrote, “We continue to see downside risk to shares until we get more clarity on an America sales recovery and a renewed margin expansion narrative.”
Baird reiterated its “Neutral” rating and lowered its price target to $17 from $20. Analyst Jonathan Komp wrote in a note, “Q4 results were fine, and while investors were braced for a soft 2020 outlook, another North America reset challenges prior expectations for UAA’s brand recovery. While we had expected a smoother transition to UAA’s measured growth phase in 2020 and beyond, the disappointing lack of progress on improving full-priced selling and operating margin challenges our prior views of 2023E EPS potential. Initial 2020E guidance looks balanced and M&A speculation could limit the downside to sentiment, though we would need more estimate visibility to recommend the stock.”
Photo courtesy Under Armour