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Stock Analyst Update

Can Under Armour Compete?

We do not expect to change our fair value estimate for the no-moat firm.


No-moat Under Armour’s (UA) 2019 second-quarter report affirms our view that it is struggling to regain brand strength and that shares are overvalued. Although the quarterly report was in line with expectations, shares dropped by a low teens percentage as investors were concerned about the 3.2% year-over-year decline in North America sales and the outlook for the rest of 2019. While the decline in North America sales was expected (we had forecast a 4% drop), the lack of momentum in either the wholesale or direct-to-consumer businesses in North America is disappointing. Under Armour expected revenue growth of 3%-4% for 2019, including a slight decline in North America sales. Despite its efforts, we do not believe Under Armour has established a premium brand. We forecast an average annual operating margin of 8% in 2021-28, well below Under Armour’s long-term expectation of operating margins above 10%. We do not think it can achieve sustained premium pricing. Its merchandise is frequently discounted at no-moat retailers like Dick’s Sporting Goods and Kohl’s. Moreover, Under Armour operates 165 outlets in North America but just 16 full-price stores. We believe some competitors, including wide-moat Nike and narrow-moat Adidas, are having better success with their wholesale and direct-to-consumer efforts in the U.S. and other markets because they have stronger brands and more diversified products.

Under Armour’s full-year outlook met our expectations. We do not expect much product innovation this year, but new products in 2020 will be critical. We do not expect to change our fair value estimate of $17.10 and continue to view shares as overvalued.

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