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Under Armour: Nobody Left To Protect The House

Nov. 02, 2017 10:19 AM ETUnder Armour, Inc. (UA), UAA82 Comments
Jared Orr profile picture
Jared Orr


  • The sales slump is not the only problem to worry about.
  • Margins are in a downward spiral.
  • Estimates, while revised down significantly, are still too high.
  • Shares are set to drift into the single digits.

Under Armour’s (NYSE:UA)(NYSE:UAA) 3Q17 report, and more importantly, its 4Q17 outlook was a complete unmitigated disaster. Before the release, I was expecting 4Q EPS of about $0.10 ($0.21 consensus), FY18 EPS of $0.30 (consensus was $0.43) and viewed a fair value of $9-$13. The new UAA guidance was worse than I expected and implies 4Q adjusted EPS of just ($0.01)-$0.01, about a dime short of my estimate and ~$0.20 shy of the street. This warrants a valuation in the mid-high single digit range.

Everyone seems to agree that there is more pain to be had and no one is quick to catch this proverbial falling knife (last quarter there seemed to be more optimists bopping around). Although it seems fairly consensus, I still like the UAA short trade (especially paired with a Nike (NKE) long) and here’s why:

  1. The sales growth has slowed and signs of a recovery aren’t in sight. This is the most obvious bear case point, and popular to discuss so I’ll just stop there. I will point out, however, that North American wholesale accounts for 63% of UAA sales vs. NKE’s 30% exposure. This is one of my key points on advocating the pair trade.
  2. Gross margins are bad and getting worse. 4Q guidance implies gross margins of about 41.2%, a ~350bps decline from last year's 44.7% and 10% below the 4Q13 GM of 51.3%. With inventories growing 22% and a sluggish sales outlook, I expect margin deterioration to continue into the first half of 2018 as well (maybe not at a 300+bps clip, but deterioration nonetheless). Given the wholesale distribution point expansion we saw this year, I would expect this lower margin profile to be a new normal.
  3. Inventories are a disaster. Inventories up 22% vs. sales down 4.5% is not a ratio that leads to margin recovery. One

This article was written by

Jared Orr profile picture
Previously a Portfolio Manager at Quad Capital.  Also worked as a consumer analyst at Scopus Asset Management and as a sell-side associate at Morgan Keegan.  Currently seeking a new opportunity.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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