EUR 850.00 For Business Accounts Only

Morningstar | Narrow-Moat Under Armour Posts Strong Third Quarter; Restructuring Efforts Gain Traction

With shares jumping 25% after third-quarter results, Under Armour is now trading near our $21 fair value estimate. In our view, Under Armour’s restructuring efforts focused on reducing planned promotional events and supply chain initiatives (reduced SKUs, vendor consolidation, and a new ERP system) are the key highlights from the quarter. Looking ahead, we believe Under Armour's new inventory management and marketing strategies will allow the firm to further expand internationally while supporting greater North American direct-to-consumer full-priced sales.

The success of its restructuring efforts was evident with improving North American revenue trends and continued International expansion. Revenue increased by 2%, while adjusted gross margin expanded 20 basis points to 46.5%. Management reiterated most of its full-year outlook calling for revenue to increase 3%-4% and gross margin to be flat to down (in line with our full-year expectation of 3.6% growth with 46% gross margins) but raised adjusted earnings per share expectations to $0.19-$0.22 (up from $0.16-$0.19). The update was primarily driven by improved adjusted operating income and one-time tax benefits. As a result, we do not plan to materially increase our fair value estimate as we believe our long-term assumptions calling for on average annual sales growth of 8%, gross margins of 49%, and operating margins of 12.5% over the next 10 years are realistic.

Overall, we believe the firm’s turnaround plan is gaining traction and drove operating margins to 8.3% (versus 4.4% last year). The firm improved its supply chain by cutting SKUs by 40% and reducing the go-to-market calendar by 4-5 months. Additionally, with planned promotional days in North America down by one third (2018 versus 2017) and the firm’s continued effort to manage the inventory overhang from 2017 (inventory down 1%), we expect reduced discounting going forward, lending credence to the brand intangible asset behind our narrow moat rating.