Before the open today, beleaguered sports apparel and
footwear company Under Armour (UAA 22.19, +1.41, +6.81%) issued upside 4Q18 results and also
reaffirmed its outlook for FY19, which sent shares popping higher by 6.5% this
morning. Slowing growth, especially in its core North American market (~72% of
total revenue), inventory issues, and market share losses to rival Nike (NKE)
have plagued the company and its stock over the past year or so. Additionally,
the stock's lofty valuation (1-Year P/E of ~65x) would suggest that the company
is still in the midst of its hyper-growth days, but that suggestion clearly does
not quite pair with the company’s actual operations, as revenue growth has
plummeted, settling at 1.5% this quarter versus the 20-30% range seen a couple
With that in mind, it comes as no surprise that short interest in the stock has been quite high, estimated at about 20% of the float. So, when the company exceeded expectations this morning, boosted by a sharp lift in margins, and reiterated that it expects its North America business to stabilize this year, the stage was set for a potent short squeeze. Overall strength in the broader markets this morning also helped its cause; optimism regarding a potential deal between Congress and President Trump has lifted investor sentiment.
Furthermore, the company's restructuring efforts, which it began implementing in 2017, have also significantly improved its profitability and cash flow. Specifically, the plan is expected to net the company $110-$130 mln in savings due to improvements in sourcing, product segmentation, and some workforce reductions.
While its earnings report and outlook offer some encouragement, indicating that the worst is now over for the company, there is clearly a lot of work to do in this turnaround effort. Main rival Nike is coming off an impressive Q4 performance in which it handily exceeded analysts' expectations, with revenue up about 10%, easily outpacing UAA's growth. For FY19, NKE guided for currency neutral revenue growth in the high single-digit range, with the potential to hit double-digits, versus UAA's expectation of 3-4% growth. In particular, NKE's sportswear category, which experienced a 20% jump in sales in Q4, seems to have cut into UAA's share.
On that note, the discrepancy in customer demand between NKE and UAA apparel is something that Dick's Sporting Goods (DKS) has commented on during its past couple of earnings call. While DKS said it has been pleased with NKE's product cycle, the company lamented that UAA sales have been soft due to the company's decision to expand distribution. NKE's superior product innovation and its successful digital transformation have really provided it with a competitive moat that UAA will need to make inroads against.
UAA reported Q4 EPS of $0.09, beating the $0.04 consensus, with revenue up 1.5% to $1.39 bln verus the $1.38 bln expectation. During its Investor Day on December 12, the company updated its FY18 guidance, forecasting EPS of $0.21-$0.22 -- implying Q4 EPS of $0.04 to $0.05 -- with adjusted gross margin improving by 20-30 basis points to 45.2%.
It's a bit of a head-scratcher given how close we were to the end of Q4 at that time, but UAA outperformed its own EPS guidance by a fairly wide margin of $0.05/share. Perhaps the company was simply looking to ratchet expectations lower while setting a low bar for it to hurdle.
For the quarter, adjusted gross margin improved by a solid 160 basis points to 45.1%, primarily driven by regional channel mix, product cost improvements, lower promotional activity, and lower air freight costs. During the earnings call, management was very upbeat regarding margin improvement, noting that the margin increase came in the face of significant reductions in inventory, resulting in higher sales into its off-price channels. This suggests that UAA attained some pricing power, especially in its international markets, in which revenue jumped by 24% to $395 mln, led by Asia-Pacific's 35% growth.
The central concern, though, for investors has been UAA's struggling North American business, which sank by 2% last quarter, followed by a scant 2% bump in Q2, and zero growth in Q1. Things took a turn for the worse in Q4 as revenue in North America fell by 6%, which was in-line with its expectations. The decline was mainly driven by weak sales in its wholesale business (DKS), combined with lower sales to its off-price channel -- which is a positive in terms of its margin performance.
Also, the weakness in its North America segment was well-known heading into the report, so the softness in Q4 isn't a factor in terms of today's stock action.
What investors are taking note of is the aforementioned rise in margins, along with the improved profitability as Adjusted EPS shot to $0.09 from breakeven in the year ago quarter, and adjusted operating income hit $40 mln as compared to about ($1.0) mln the year ago period.
Since UAA provided FY18 guidance back on December 12, investors were mostly interested today in the company's guidance -- namely, whether it would reaffirm the outlook it gave for FY19 back on the 12th. And, indeed, the company did just that, reaffirming FY19 EPS of $0.31-$0.33 on revenue growth of 3-4%, including flat results for North America. Additionally, the company reiterated that it expects a 60-80 basis point expansion in gross margin due to channel mix benefits as its Direct-to-Consumer business becomes a larger percentage of total revenue. Favorable product costs and ongoing supply chain initiatives are expected to provide a lift to margins again, as well.
Back on its Investor Day, UAA stated that it anticipates total revenue growth returning to low double-digit rates by 2023, with low single-digit CAGR growth in North America between 2020 and 2022. At that time, this outlook was a major disappointment as investors were hoping for a more pronounced and quicker turnaround.
Now, with expectations ratcheted lower, combined with the anticipated margin improvement and the fact that UAA hasn't adjusted its guidance and growth trajectory outlook, investors are taking this as a win.
Key Takeaways: By no means is business booming again for UAA, and, based on NKE's impressive Q4 report, it is clear that UAA has lost market share to its rival. On that note, the discrepancy in customer demand between NKE and UAA apparel is something that Dick's Sporting Goods has commented on during its past couple of earnings call. While DKS said it has been pleased with NKE's product cycle, the company lamented that UAA sales have been soft. So, UAA certainly has some work to do. However, the boost in gross margin in Q4 and its outlook for gross margin expansion indicates that the worst might be over in terms of the inventory issues that plagued in last year, causing it to be far more promotional than it would like. Furthermore, the fact that it reaffirmed its outlook for FY19 has investors hopeful that the North American business has bottomed up and is on the mend. So, there are some encouraging developments here, but today's sharp move higher is also simply a function of some short covering, amplifying the move.
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