Technology

Under Armour (UAA) Up 1.2% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Under Armour (UAA). Shares have added about 1.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Under Armour due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Under Armour Beats on Q3 Earnings, Trims Revenue Forecast

Under Armour, Inc. reported better-than-expected third-quarter 2019 results. However, we note that a federal accounting probe and trimming of 2019 revenue growth forecast hurt investor sentiment.

This athletic apparel maker reported quarterly earnings of 23 cents a share that surpassed the Zacks Consensus Estimate of 18 cents but declined 8% from the year-ago figure of 25 cents. Lower revenues and higher SG&A expenses might have impacted the bottom-line performance. Nonetheless, this was the fifth straight quarter of bottom-line beat.

Net revenues fell 0.9% (or flat on a currency neutral basis) to nearly $1,429.5 million but came ahead of the Zacks Consensus Estimate of $1,408 million, after missing the same in the preceding quarter.

Under Armour’s third-quarter results came in better than management’s expectations of 2-3% revenues decline and earnings of 17-18 cents a share.

We note that while direct-to-consumer revenue (represents 32% of total revenues) fell 1% to $463 million, wholesale revenue declined 2% to $892 million.

Apparel revenues inched up 0.7% year over year to $985.6 million, while Footwear revenues decreased 12% to $250.6 million. Revenues from accessories category increased 1.7% to $118.2 million. Meanwhile, Licensing revenues declined 5.6% to $29.6 million, whereas the company’s Connected Fitness segment reported an increase of 22.3% to $39.3 million.

Net revenues from North America fell 4.1% to $1,015.9 million. Remarkably, international business continued to witness decent growth, rising 4.8% (or up 8% on a currency-neutral basis). Within international business, net revenues from EMEA and Asia-Pacific regions grew 9% and 3.7% to $161 million and $154.9 million, respectively. However, Latin America revenues decreased 3.9% to $52.2 million.

The company’s gross margin expanded 220 bps to 48.3%, courtesy of supply chain endeavors, channel mix and restructuring charges in the year-ago quarter. SG&A expenses grew 4.4% to $551 million, while as a percentage of net revenues, the same increased 190 bps to 38.5%. Net interest expense fell sharply about 38.2% to $5.7 million.

Other Financial Details

Under Armour ended the quarter with cash and cash equivalents of $416.6 million, long-term debt (net of current maturities) of $592 million and total shareholders' equity of $2,153.7 million. While cash and cash equivalents more than doubled year over year, total debt was down about 26%. Additionally, management expects to incur capital expenditures of approximately $180 million in 2019.

Guidance

Management now envisions 2019 net revenues to be up approximately 2% versus the prior projection of 3-4% increase. Under Armour cut its revenue growth forecast on account of lower than planned excess inventory to service the off-price channel; lingering traffic and conversion challenges in direct-to-consumer; and adverse currency fluctuations.

The company now expects full-year earnings to reach the high end of the previously guided range of approximately of 33-34 cents a share.

Under Armour now anticipates gross margin to improve 90-110 bps (versus the prior estimate of 70-90 bps) from the 2018 adjusted figure. The expansion is likely to be backed by favorable channel mix and supply-chain efforts. Operating income is now projected to reach the high end of the previously expected range of about $230-$235 million. The company estimates net interest and other expense of $30 million.

Management expects direct-to-consumer business to improve during the fourth quarter on account traffic growth, conversion and new door openings, also supported by an easier prior-year comparison in North America. Again, Under Armour expects direct-to-consumer business to be up marginally in 2019.

Under Armour expects licensing business to be up in the final quarter on account of contractual royalty minimums, in addition to a settlement related to one of its North American partners.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -27.4% due to these changes.

VGM Scores

At this time, Under Armour has a subpar Growth Score of D, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Under Armour has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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