Under Armour's Results Provide Stability to Its Story
The narrow-moat firm is transforming into a larger sporting goods company.
Narrow-moat Under Armour (UA) closed its books on fiscal 2017 offering investors more stability toward the firm’s transformation into a larger sporting goods company. Revenue for the fourth quarter was up 4% (currency neutral), driven by a 1% decline in wholesale but offset by direct-to-consumer (DTC) growing 11%, which places the firm above our full-year 2.4% consolidated top-line estimate. Further, it outlined fiscal 2018 guidance, which offered a low-single-digit increase to sales (mid-single-digit decline in North America and greater than 25% Internationally), with gross margins expected to increase 50 basis points to 45.5%, comparing more or less in line with our 5.6% and 45.2% estimates. We believe these results have eased investors’ concerns as key categories and segments (International, DTC, and footwear) continue to perform well and the troubled North American wholesale becomes less of a focus (expected to generate around 40% of sales in fiscal 2018, down from 46% last year). Taken together, we plan to raise our $19.50 fair value estimate by a low-single-digit percentage to incorporate these result, time value of money, and the U.S. tax reform.
We believe the brand has long-term potential, both in the U.S. and internationally, as it faces temporary issues and heavy investment periods that should dissipate and provide a tailwind to favorable margin improvement. This quarter, international grew 47% (exceeding our expectations for around 20% growth over the next decade) to 23% of sales, DTC grew 11% (we forecast 20% average annual over the next five years) to 50% of sales, and footwear rose 9%. These sales remain a key aspect of our operating margin assumptions that suggest the firm can reach 10% by fiscal 2021 from roughly 3% today. We see the firm’s almost 20% reduction in estimated fiscal 2018 capital expenditures as evidence of the heavy investment lift being behind the company (expects capital expenditures of $225 million from $275 million last year).
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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.