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Under Armour: Accounting Probe Overshadows Q3 Beat

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  • Under Armour cut its revenue growth guidance.
  • The company beat Wall Street’s estimates.

Under Armour stock fell in pre-market trading due to news about the accounting probe.

Today, Under Armour (UAA) posted stronger-than-expected third-quarter earnings. The company’s revenues and earnings beat analysts’ expectations, which should boost the stock. However, the stock was trading more than 13% lower in the pre-market session. News about the accounting probe shook investors.

On Sunday, the Wall Street Journal reported that Under Armour is under investigation for its accounting practices. The article stated that the Department of Justice is examining whether the company inflated quarterly sales numbers.

Besides being probed for the revenue-recognition method, the company cut its fiscal sales growth outlook. Reduced growth guidance will likely to add to investors’ discontent.

Under Armour’s sales and earnings beat analysts’ estimates and could provide some respite to the stock. However, weakness in the high margin direct-to-consumer sales is discouraging. Notably, Nike (NKE) and Lululemon (LULU) benefit from growing direct-to-consumer sales.

In comparison, Under Armour is struggling with traffic and conversion challenges in its direct-to-consumer business.

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Under Armour’s third-quarter earnings 

Under Armour posted revenues of $1.43 billion, which fell about 1% on a YoY (year-over-year) basis. However, the company’s sales beat analysts’ estimates of $1.41 billion. Notably, lower footwear sales remained a drag on the company’s top line.

By segments, Under Armour’s revenues increased 0.7% to $0.99 billion. Meanwhile, footwear sales fell about 12% to $0.25 billion. For accessories, the sales rose 1.7% YoY. However, licensing revenues fell 5.6%.

By sales channels, wholesale revenues fell 2% YoY. Meanwhile, direct-to-consumer revenues fell 1% YoY and represent about 32% of the total revenues.

In comparison, Lululemon Athletica had an impressive quarterly performance. The company sustained the momentum and continued to beat analysts’ estimates. Notably, Lululemon’s net revenues rose 22% YoY during the last reported quarter. The company’s margins expanded, while the adjusted EPS rose 35% YoY and beat analysts’ estimate.

Meanwhile, Nike posted solid financials during the last reported quarter. NIKE Digital and the direct-to-consumer business drove the company’s broad-based growth. Nike’s revenues and EPS marked healthy growth and beat analysts’ expectations. The company’s margins benefited from increased direct sales.

Despite lower direct-to-consumer sales, Under Armour’s gross margin increased by 220 basis points to 48.3%. The mix shift toward the higher-margin direct-to-consumer business and supply-chain initiatives drove the company’s gross margins.

Higher margins and lower interest expenses due to reduced debt drove Under Armour’s bottom line. The company posted an adjusted EPS of $0.23, which rose about 35% YoY and beat analysts’ expectations of $0.18 by a wide margin.

Updated guidance 

Under Armour lowered its top-line growth guidance. The company’s sales will likely increase about 2% in 2019. Previously, management forecasted revenue growth of 3–4%. The company cut the guidance due to challenges in the direct-to-consumer business and negative currency rates.

Under Armour expects its adjusted gross margins to expand by 90–110 basis points. Earlier, the company’s adjusted gross margin was expected to increase by 70–90 basis points. Supply-chain initiatives and the mix-shift will likely support the company’s margins.

Under Armour expects its EPS to be at the higher end of its previous guidance. Earlier, management expected the EPS to be $0.33–$0.34.

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