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).
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.
John Brick, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.