EUR 850.00 For Business Accounts Only

Morningstar | Tempered North American Growth Drags on Under Armour’s Performance, But Long-Term Thesis Intact

Despite the 10% dip in shares after narrow-moat Under Armour’s 2018 investor day, we see the updated outlook in line with our long-term forecast calling for near 8% top-line growth on a high-single-digit operating income margin on average over the next decade. We intend to lower our fair value estimate by a mid-single-digit amount due to tempered near-term forecasts, but see the market’s reaction to the tepid North American growth forecast as overblown.

Management gave updated fiscal 2018 guidance, an initial 2019 outlook, and longer-term expectations past 2023. For fiscal 2018, it raised the lower end of the operating income range to $160 million to $165 million versus $150 million to $165 million prior (and our forecast of $155 million). For fiscal 2019, the firm expects revenue to grow 3%-4% and operating income to range between $210 million to $230 million well below our 7% and $247 million estimates, respectively. Longer term, the firm expects revenue to grow at a mid- to high-single-digit rate until 2023 and then accelerate to the low-double digits (we estimate 8% average growth over the next 10 years). This growth will come from international expansion as the firm expects North American revenue to grow at a low-single-digit rate which we see as realistic as we forecast international revenue to account for 40% of total sales by 2027 (currently at low 30s).

We believe Under Armour is taking the right steps by making brand-accretive investments which underpins our narrow moat. Under Armour improved its supply chain by diversifying sourcing while reducing go-to-market times by five months, which we believe will help the firm keep inventory fresh and on-trend for consumers thus accelerating top-line growth and reducing discounting. We see the emphasis on direct-to-consumer channels as margin-accretive since Under Armour has more control over discounting and brand presentation (we forecast gross margin increasing 390 basis points to 49% over our forecast).