EUR 850.00 For Business Accounts Only

Morningstar | No-Moat Under Armour Beats 1Q Expectations on Cost Control and Wholesale Sales; Shares Overvalued

No-moat Under Armour exceeded expectations in the first quarter of 2019 as EPS of $0.05 beat our breakeven forecast. Under Armour’s first-quarter North America sales decline of 2.8% was better than our forecast of a 6.0% decline. We think, though, Under Armour continues to underperform market activewear growth of about 3% to 5% as its performance apparel continues to lose share to athleisure. Under Armour’s international sales of $328 million nearly matched our forecast of $331 million. While we think Under Armour has potential in international markets, its brand is little known outside of North America. Under Armour’s first-quarter selling, general, and administrative expenses as a percentage of revenue of 42.3% was 230 basis points better than our forecast. We think Under Armour has implemented improvements in its supply chain and that its selling, general, and administrative expenses as a percentage of sales will decline to 40% over the next three years. We expect to increase our fair value estimate on Under Armour by a low-single-digit percentage from the current $16.70, but we view shares as overvalued.

We think Under Armour’s competitive position has weakened over the past three years. Under Armour’s apparel sales grew less than 1% in the first quarter of 2019 as trendy apparel from narrow-moat Adidas and other rivals continues to perform well. Under Armour is in direct competition with Adidas and wide-moat Nike in the U.S. and international markets and we think they both have stronger brands, product lines, and marketing than Under Armour. We think Under Armour’s product is not sufficiently differentiated and that it has fallen behind on innovation. Also, we think it continues to struggle with key customers, such as no-moat Dick’s Sporting Goods. We maintain our view that Under Armour’s competitive position and North America share will not improve in either the short or long term.

Under Armour’s North America sales in the first quarter ($843 million) beat our view, but was lower than North America sales in the first quarter of 2016 ($881 million) despite the introduction of Under Armour gear at no-moat Kohl’s in 2017. Under Armour may overcome weakness with e-commerce and sales through its stores, but its direct-to-consumer sales suffered a year-over-year decline of 6% in the first quarter of 2019. We view this result as disappointing as we had forecast a 5% increase in 2019 direct-to-consumer sales. We think the direct-to-consumer channel is critical for Under Armour as physical stores continue to lose sales to e-commerce and discounters.