Under Armour's Results Highlight Turnaround Efforts

Narrow-moat  Under Armour (UA) ended fiscal 2018 with a solid quarter and we do not anticipate changing our $20 fair value estimate. Under Armour completed its restructuring efforts and entered the final year of its Protect This House initiative, which has helped it improve its go-to-market process, reduce SKUs, and establish stronger regional structures to foster international growth. These efforts give us confidence in our long-term forecast calling for high-single-digit sales growth on a high-single-digit operating income margin on average over the next decade.

For the year, Under Armour posted 4% sales growth on 45.5% adjusted gross margin and 3% adjusted operating margin (comparable to our 3%, 45.5% and 3% marks, respectively). Additionally, management reiterated fiscal 2019 guidance, calling for revenue to grow 3%-4% and operating income to range between $210 million and $230 million, which is near our 4% and $208 million estimates, respectively.

We contend that stabilizing the domestic segment (about 70% of fiscal 2018 sales) has been vital in Under Armour’s turnaround. Sales dipped 2% for the year (in line with our forecast) as the firm reduced wholesale distribution and SKUs through off-price sales. However, we see these efforts as brand accretive as the firm refocuses on cultivating its image as a high-performance apparel retailer. As evidence, inventory dropped 12% and adjusted gross margin increased 160 basis points (to 45.1%) in the quarter; we forecast adjusted gross margin increasing 390 basis points to 49% over the next decade. We continue to believe its improved supply chain (diversifying sourcing and reducing go-to-market times by five months) will keep inventory fresh and on-trend for consumers thus accelerating top-line growth and reducing discounting. We believe in aggregate these efforts will continue to improve Under Armour’s reputation for performance and innovation, which has resulted in pricing power and underpins our narrow-moat rating.