Under Armor Stock: recovery on track (NYSE: UA)

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Sportswear company Under Armor (New York Stock Exchange: UAA) (NYSE: AU) announced a strong 2021, after years of lackluster results. Revenue increased 27% year-on-year, with growth across all geographies and categories. North America, their largest market, saw revenue growth of 29% YOY to USD 3.8 billion, while international revenues increased 34% YOY to USD 1.9 billion (EMEA up 41% YOY, Asia-Pacific up 32% YOY) year and Latin America up 18% year-on-year).

Short term challenges

Short-term challenges associated with supply chain disruptions and cost inflation due to rising transportation costs (Under Armor shifted to more expensive air freight to avoid shipping backlogs) could reduce margins in the next quarter. Additionally, as lockdowns ease and consumers shift spending from goods to services, Under Armour, like other activewear players, could face revenue headwinds in the coming months.

Turnaround generating results, long-term benefits

After generating double-digit sales growth for years, starting in 2016, sales growth fell into single digits and gross margins also declined slightly. Several factors are behind the company’s poor performance, including SEC investigations related to the company’s accounting practices, scandals related to employees visiting strip clubs at company expense, and the changing consumer trends as performance sportswear began to wane in popularity while athleisure began to take off in 2015. Sportswear titan Nike (NKE) was also not spared by changing consumer tastes, the trend contributing in part to Nike’s revenue falling to mid-single digits (from mid-teens to high-digits previously). However, while Nike and Adidas (OTCQX:ADDYY) adapted early to the athleisure trend, Under Armour, which was hesitant to join, finally did in 2016 but having apparently been late to the party, then retired in 2018, deciding instead to remain laser-focused on performance apparel. Under Armour’s reluctance to capitalize on the growing athleisure trend has resulted in lost market share for longtime rivals Nike and Adidas as well as new players like Lululemon (LULU). After years of overtaking Nike in sales growth, the situation began to reverse, with Nike’s sales growth outpacing that of Under Armour. Nike has also fared considerably better than Under Armor during the pandemic when growing fitness trends, and working-from-home employees swapping office clothes for sportswear further fueled the athleisure boom. Meanwhile, Lululemon, a pioneer of the athleisure trend, has seen revenue grow steadily in double digits over the past few years. Compounding Under Armor’s problem was a buildup of unsold inventory that led to off-price sales (which diluted brand value) and pressure on margins.

Under Armour, Nike, Lululemon revenue growth

Author

Under Armor announced a five-year turnaround plan in 2018 that included building its Direct-to-Consumer (D2C) channels (a strategy that worked extremely well for Nike), reducing ties with wholesale stores, building the Under Armor brand and cost-cutting measures that included job cuts. The company hasn’t made any changes to its performance apparel focus, however. Under Armour’s founder and then-CEO Kevin Plank has stepped down and handed over the reins to sportswear veteran Patrick Frisk, who has experience at outdoor brands The North Face and Timberland, and the brand action sports shoes. In 2021, Under Armor closed approximately 2,500 stores in 2021, primarily in North America, which helped build brand strength in terms of brand consistency across customer touchpoints.

Inventory levels were reduced, allowing the company to reduce its reliance on markdowns to move excess inventory and thus increase full-price sales. Strict inventory control has been maintained even during the pandemic, when supply chain disruptions prompted a number of companies to stockpile as a defensive measure. Around 400 workers (about 3% of the company’s workforce) were laid off in 2019 and another 600 employees were laid off in 2020 in a bid to control pandemic-induced losses. Meanwhile, last year the company agreed to pay $9 million to settle SEC charges related to accounting practices, finally ending the years-long investigation.

The turnaround plan appears to be delivering results, with the company delivering record revenue and profit for fiscal 2021. Revenue grew 27% year-over-year to $5.7 billion in fiscal 2021, outpacing Nike for the first time since 2017. Gross profit grew at a faster pace, 32% year-on-year to $2.8 billion, which helped push gross margins up to 50.4%, its highest high level of the past decade, thanks to a more favorable channel mix, slightly offset by supply chain headwinds.

Under Armor gross margins:

FISCAL YEAR 2021

50.4%

FISCAL YEAR 2020

48.6%

FISCAL YEAR 2019

46.9%

FISCAL YEAR 2018

45.5%

FISCAL YEAR 2017

45.2%

FISCAL YEAR 2016

46.5%

FISCAL YEAR 2015

48.1%

FISCAL YEAR 2014

49.0%

FISCAL YEAR 2013

48.7%

FISCAL YEAR 2012

47.9%

The company’s D2C investments also appear to be paying off with D2C sales up 26% to $2.3 billion in 2021, with strong momentum in owned-and-operated stores and 4% growth in their retail business. e-commerce. D2C is typically a higher margin business and this is likely to be a significant driver of Under Armour’s improved margins.

Under Armor’s transformation has resulted in a leaner organization, better branding and a more profitable operating model, all of which portends potentially better profitability for the company in the longer term.

Sales growth may not be as robust as last year, however. Under Armor’s record sales growth in fiscal year 2021 was driven by a few factors, including reduced promotional pricing and a pandemic-induced sales decline in 2020; while sales in fiscal year 2021 jumped 27% over fiscal year 2020, it was only a 7% increase over the pre-pandemic year 2019. Nike, on the other hand , grew sales nearly 14% in the fiscal year ended May 2021 compared to the fiscal year ended May 2019. Although Under Armor may be better positioned to drive revenue growth through to a pricing strategy through brand value recovery, prices can only increase to a certain extent, and with Under Armor remaining steadfast in its decision to focus on performance wear and avoid the athleisure market, future revenue growth may not be as stellar as in fiscal 2021. the market is expected to grow 25% by 2025). The trend is a boon for industry rivals like Nike, while Under Armor will need to look to other areas to sustain revenue growth.

International sales

Under Armor’s international sales have historically been lower than Nike’s (Nike derives approximately 60% of its revenue from outside of North America, compared to Under Armour’s 33%), but it has trended upwards. the constant rise; Under Armor’s international sales were $507 million in fiscal 2015, representing just 13% of revenue that year. By fiscal 2021, that figure had tripled to approximately $1.8 billion, representing a CAGR of approximately 13%. There is ample potential for growth and the company has mentioned growing international sales as part of its five-year growth strategy. However, this could come at a cost due to heavy marketing expenses.

finance

With a cash balance of $1.7 billion and approximately $662 million in long-term debt, the company has net cash of approximately $1 billion. On other metrics, Under Armor is ahead in gross margins, but the company’s overall return on assets lags its peers. The company’s debt to equity ratio is decent, but it’s not as strong as Lululemon, which has among the best margins, return on assets as well as debt position. With a P/E of 19, Under Armor is quite cheap compared to its peers, but the company also has relatively high short interest.

Last deposits

under protection

Nike

lululemon

Gross margin %

50%

46%

57.7%

Return on assets %

6.5%

12%

18%

Total Debt / Equity

72%

85%

32%

PER

19.5

33

38

Short interest

4.3%

0.99%

2.4%

Summary

The activewear space could face challenges in the near term due to supply chain bottlenecks, cost inflation and the shift in consumer spending from goods to services as blockages are released. Headwinds could impact Under Armor’s revenue and earnings growth.

Under Armour’s long-term transformation appears to be delivering results; inventory management reduces markdowns and thus supports sales growth while D2C investments increase margins. However, with the company continuing to avoid the growing athleisure segment, Under Armor will have to look to other growth areas. International markets have been highlighted as an opportunity for long-term expansion, but profitability could take a hit (although it would likely be a short-term pain for long-term gain).

Analysts are generally torn between buying and holding.

Under Armor Analyst Ratings

WSJ

James T. Quintero