Under Armour Inc (UAA)

[JohnCM]

Under Armour: Down For The Count?

Nov. 1, 2017 8:05 PM ET - Seeking Alpha

Under Armour crashed following disappointing Q3 results.

The news leading up the report signaled the potential weakness.

The performance sports brand has plenty of expansion opportunities, but turnarounds are historically difficult to time.

Under Armour (UA, UAA) posted hideous Q3 results that have bears piling on an already negative situation. My previous research though highlighted this very exact scenario playing out.

The Under Armour Class A shares closed the day at $12.52 and are now trading around $12.00. The question is whether breaking even the bearish Wells Fargo $13 price target is the ultimate buying opportunity.

Leading up to the Q3 results, investors got hints that business wasn't going that well. The Wall Street Journal reported on October 23 that the performance sports apparel company was looking at exiting categories like tennis and fishing. Naturally, the primary reason to drop categories are disappointing results and the need to streamline operations.

This news was troubling and led to my tweeting the night prior to earnings that Q4 guidance could be ugly.

Ironically, Under Armour didn't officially announce any such decisions along with the Q3 results, but the company might want to wait until after the holidays and make such moves along with the Investor Day next year.

The Q3 numbers were indeed ugly with revenue down 5% to $1.4 billion as North American wholesale revenue declined by 13% to $880 million. International revenues were up a strong 35% and footwear actually held steady with 2% growth to $285 million.

So despite seeing value in the stock with a strong brand trading at a low P/S multiple in comparison to a Nike (NKE), my desire to actually load up on the stock was reduced. Stocks in a deep downtrend are very difficult to turn around with the bottom unknown, and Under Armour proved this reality with a horrendous Q3 and weak holiday guidance as inventory soars.

Incredibly, the stock only has a market value of $5.5 billion now with sales approaching $5 billion this year. The problem is that Under Armour hasn't proven the ability to generate sustainable profits. The company built the current organization on the basis of a much larger business in the future, but CEO Kevin Plank still needs to prove the ability to generate massive cash flows.

The updated guidance leaves Under Armour precariously close to breakeven for the year. Sure the company earned an adjusted operating profit of $100 million in Q3, but the full year forecast is now only a meager $140 to $150 million. Operating margins in the single digits aren't going to cut it for the market cap to recover.

While Under Armour is struggling in North America, plenty of long-term upside exists in international locations and footwear. Part of the income issues and the reasons the WSJ discussed the exiting of business lines is that the company is spread very thin including still developing these areas.

Footwear revenues are meager at only $285 million last quarter. At an annual run rate of somewhere around $1 billion, the company far trails the levels at Nike that sold $5.5 billion worth in the last quarter alone. Yes, Nike has a footwear business that topped the total sales of Under Armour in one quarter alone.

As well, international expansion is still in the relatively early stages for Under Armour. The highest revenue total for a region outside of the U.S. is now Asia-Pacific at only $130 million in the last quarter.

Source: Under Armour Q3'17 earnings release

Nike did over $300 million in apparel alone in all three international regions of EMEA, Greater China, and APAC/Latin America. The divisions don't exactly match those of Under Armour, but the scale of operations are enormous at Nike in comparison to the lagging performance sports company.

Under Armour has an incredible opportunity to expand the market and grow market share outside North America. The key investor takeaway is that Under Armour has to return to a performance and innovation focus to maintain the brand. If done correctly, the company has decades of growth ahead in expanding in footwear and internationally.

As my investment thesis has said for a while now, the stock has value trading down at roughly a P/S multiple 1. The stock though can always go lower so investors need to be careful while diligently waiting for the turn of one of the better retail brands.