Long-Term Thesis on Under Armour Is Intact
As challenges in North America linger, we're lowering our fair value estimate on the narrow-moat firm.
Under Armour’s (UA) third-quarter results showed the company is in the midst of two battles: internal execution and a challenging external North American market. Against this backdrop, we plan to lower our fair value estimate by a midteens percentage, from $24 prior, as we see the North American challenges lingering into 2018. Our update also incorporates the firm’s updated 2017 guidance of low-single-digit revenue growth (9%-11% prior) and adjusted operating income of $140 million-$150 million ($280 million-$300 million prior) versus our prior assumptions of 9% and operating income of around $283 million.
We still believe there is long-term potential for the brand, consistent with our narrow moat rating, but challenges derived from an increasingly large company (this quarter was affected by its enterprise resource planning, or ERP, system integration) and the promotional environment place Under Armour in a continued turnaround position. While the firm’s investments in infrastructure hurt near-term operating income, they support its brand intangible asset long-term, in our view. We still believe investments will bear fruit, as international grew 35% (exceeding our expectations for around 20% growth over the next decade) to 22% of sales, direct-to-consumer, or DTC, grew 15% (we forecast 20% average annual over the next five years) to 33% of sales, and footwear rose 2% (lapping a 42% gain last year).
Our long-term forecast assumes operating margins approach 13% by fiscal 2026, as key categories capture scale from their investments, North American retailer disruption dissipates (fewer promotions), and Under Armour grows closer to the consumer (DTC), which garners more control of the consumer experience and better matches consumer preferences and demands. While fiscal 2017’s guidance implies around 3% operating margins, we’d point investors to fiscal 2014, when the firm boasted around 11.5% operating margins, showing the firm's turnaround trajectory potential.
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John Brick, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.