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Can Under Armour Outpace Q3 Expectations?

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Under Armour (UAA) is set to declare its third-quarter earnings results on November 4. The footwear and athletic apparel company announced its CEO succession plans on October 22. It named Patrik Frisk, its current president and COO, as its new CEO to succeed founder Kevin Plank effective January 2020. Investors reacted positively, and the stock rose 6.4%.

Under Armour lagged analysts’ revenue expectations in the second quarter. Notably, continued weakness in its North American business impacted its results. The company’s second-quarter revenue rose 1.4% driven by its international business.

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Under Armour’s third-quarter revenue expectations

Under Armour expects the weakness in its North American business to persist. Based on the guidance it issued in July, the company expects its third-quarter revenue to fall in the range of 2%–3%. Lower sales to the off-price channel, softness in the DTC (direct-to-consumer) business, and the timing of distributor sales in the international business are likely to dent the company’s top line.

As part of its multiyear transformation plan, Under Armour has reduced its number of products so it can focus on the profitable ones. Also, it’s been reducing its exposure to the off-price channel to revive its image as a premium brand. However, competition from larger players Nike (NKE) and Adidas are affecting Under Armour’s growth in the North American market. Under Armour lags its peers in terms of innovation.

In September, Nike reported a 7.2% rise in its fiscal first-quarter revenue. Nike experienced growth in the domestic as well as international markets. Analysts expect Under Armour’s third-quarter revenue to come in at $1.41 billion, reflecting a YoY decline of 2.3%.

Columbia Sportswear (COLM) reported its third-quarter earnings results on October 30. Its revenue rose about 14% to $906.8 million. Columbia Sportswear handily exceeded analysts’ revenue forecast of $883.2 million. Also, its EPS of $1.75 came in ahead of analysts’ outlook of $1.55.

Will profitability improve in the third quarter?

As part of its transformation plans, Under Armour has been optimizing its supply chain. These initiatives have helped it deliver a 170-basis-point improvement in its second-quarter gross margin.

Under Armour expects its third-quarter gross margin to expand by about 120–140 basis points on an adjusted basis. Moreover, its reported gross margin is expected to rise 130–150 basis points. A favorable channel mix (due to a lower proportion of off-price sales) and supply chain initiatives, including lower air freight, should benefit its gross margin.

Overall, the company expects third-quarter EPS in the range of $0.17–$0.18. Meanwhile, analysts expect the company’s adjusted EPS to decline 28% to $0.18.

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Valuation ahead of results

Under Armour stock has risen 16.9% so far this year. However, it’s lagging the 21.2% rise in the S&P 500. As of October 31, Nike and Columbia Sportswear are up 20.8% and 7.6%, respectively, this year. Under Armour stock is rated a “hold” by 15 out of 29 analysts, while nine call it a “buy.” Five analysts have “sell” recommendations.

As of October 31, Under Armour was trading at a 12-month forward PE of 43.9x. Nike and Columbia Sportswear were trading at forward PE multiples of 28.3x and 17.8x, respectively. Currently, analysts expect Under Armour’s 2019 revenue and adjusted EPS to rise 3.1% and 26%, respectively. They expect a 5.3% rise in its fiscal 2020 revenue and a 47% rise in its adjusted EPS.

Under Armour’s management expects full-year revenue growth of 3%–4%. A slight decline in North American revenue might overshadow low- to mid-teen growth in international revenue. Under Armour expects 2019 EPS of between $0.33 and $0.34. Meanwhile, investors will be looking forward to any update on its North American business and revisions to its 2019 outlook.

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