Under Armour: Stay Long, The Story Is Still Intact

Summary

• Under Armour reported Q2 2018 results that beat the top- and bottom-line estimates. Management also raised their full-year 2018 guidance.
• It is important to remember that the company's revenue growth profile should be the focus through at least the end of 2018.
• Under Armour's long-term story is still intact so I plan to stay long the stock.

Under Armour (NYSE:UA)(NYSE:UAA) is (and has been) a "show me" stock so investors should be encouraged about the fact that the company has reported impressive operating results so far in 2018. To this point, Under Armour recently reported strong Q2 2018 results that beat both the top- and bottom-line estimates. Additionally, the management team raised their full-year 2018 guidance. It was a classic beat and raise. As a direct result, the stock finished the trading day up ~4%, which brings the stock’s YTD performance to an outstanding 42%.

UAA data by YCharts

While UAA shareholders have enjoyed a nice start to 2018, Under Armour’s long-term story is still intact so I believe that the stock still has room to run.

The Story Is Still Intact And The Q2 2018 Operating Results Prove it

During the Q4 2016 conference call, Mr. Kevin Plank, Chairman & CEO, made the following comment about his restructuring plans:

"Our goal is to take UA from a great brand with good operations to a great brand with great operations. We've got some work ahead of us, and we'll use 2017 to focus on increasing our operational discipline as we look to build out our $10 billion business."

Mr. Plank's restructuring plans revolve around structurally changing Under Armour's operations, while also focusing on creating a differentiated sports apparel company with its brand being the centerpiece. So far, so good.

A lot has been falling into place and the company's most recent quarterly results show that the restructuring efforts are already bearing fruit.

On July 26, 2018, Under Armour reported in-line Q2 2018 EPS (loss of $0.08) on revenue of $1.17B (beat estimates by $20M). The following were the highlights from the quarter:

• Revenue up 8% YoY to $1.17B (7% on a currency neutral basis).
• North America revenue increased by 2% YoY (to $843M) and international revenue increased by 28% YoY (to $302M).
• Gross margins decreased 110bps (to 44.8%), as both inventory and restructuring charges came into play.
• Adjusted net loss of $0.08 compared to an adjusted net loss of $0.03 for the same quarter of the prior year.

The focus for Under Armour has been its revenue growth potential, and rightfully so, as the company is in the middle of a major restructuring plan. To this point, the company recognized pre-tax costs of $85M ($64M in cash related charges and $21M in non-cash related charges) in Q2 2018, which obviously negatively impacted margins and earnings in a very material way. Investors should expect more of the same over the next few quarters because management increased their restructuring estimates and now expects to incur costs in the range of $190M-$210M (up from a range of $110M-$130M) in the current year.

As such, investors will need to look past the company's margins and earnings in 2018 (and probably into early 2019) because there will be a lot of noise in the numbers over the next few quarters. However, let's not forget that the investments being made to improve Under Armour's cost structure and inventory management will pay huge dividends in the years ahead. This is a classic case of dealing with short-term pain in order to enjoy the long-term gain, of course, in my opinion.

From a top-line perspective, there was a lot to like about the Q2 2018 results. As described above, total revenue increased by 8% YoY with the company's international business leading the charge. Additionally, the company's 2% revenue growth in the U.S. may not seem like much but this is the first quarter in some time that Under Armour reported domestic top-line growth. Nothing to brag about but is definitely a step in the right direction, especially given the challenging environment that the company is operating in.

Management also updated their fiscal 2018 guidance:

Source: Q2 2018 Press Release

The single-digit top-line growth that is expected for full-year 2018 is nothing to write home but it is encouraging from a long-term investors perspective that the restructuring efforts are already having a positive impact on the company's operations. In my opinion, Under Armour appears to be well-positioned for 2019 and beyond.

Valuation

Under Armour is trading at an attractive valuation when compared to its closest competitor.

UAA PS Ratio (TTM) data by YCharts

Under Armour's growth story is a lot different now than it was a few short years ago so it makes sense that the P/S ratio is nowhere near the pre-2017 levels but, in my opinion, shares are attractively priced below 2x sales. It is easy to get too caught up in trying to value Under Armour so, at the end of the day, I believe that it really comes down to whether or not you believe that management is going to be able to properly position this company (and its brand) for the years ahead. In my opinion, management has recently displayed the ability to right the ship.

Risks

Under Armour is a high risk, high reward stock/company so I do not believe that it should account for more than 2%-3% of a stock portfolio. With that being said, this retailer has a great brand and a management team that appears to be learning from their past mistakes (the new talent has been helpful too). In my mind, the number one risk to Under Armour's story is related to the current restructuring efforts. If management fails to create a more efficient company that is build for the 'new' retail space, shareholders will be in for an extremely bumpy ride over the next two-to-three years.

Another risk factor that needs to be monitored is the company's financial leverage. Management has been taking on debt to finance the restructuring efforts (and business operations), so they will need to get a handle on Under Armour's balance sheet sooner rather than later.

Bottom Line

Under Armour's revenue growth profile should be the focus for 2018, so I believe that there was a lot to like about the company's Q2 2018 results. Margin pressure and earnings (or lack thereof) will be the main focus for the bears but, in my opinion, the restructuring efforts will be worth dealing with the current [short-term] headwinds. The turnaround story is real and it appears that Mr. Plank finally has Under Armour positioned to win in the ever-changing retail space.

UAA and UA shares do not come without risks but, in my opinion, Under Armour is a great investment if (yes, a big "if") you believe that the company's long-term story is still intact. As such, long-term investors should treat any significant pullbacks as buying opportunities.

Full Disclosure: I have a small UAA position in the R.I.P. portfolio.

Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.

Disclosure: I am/we are long UAA. 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.