Under Armour Earnings Preview: Forward EPS Estimates Stable But Revenue Estimates Seeing Lower Revisions

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About: Under Armour, Inc. (UAA), UA
by: Brian Gilmartin, CFA
Summary

The mid-December '18 investor meeting gave the first look at 2019 guidance, which was $0.31-0.33 in EPS vs. the $0.35 estimate.

Under Armour rose 22.5% in calendar '18.

Forward revenue estimates for 2019 and 2020 continue to be revised lower.

Under Armour (UAA), the apparel manufacturer that has been plagued with ERP implementation issues as well as renewed competition from Adidas in the US sports apparel market the last two years, reports their calendar 4th quarter, 2018, financial results before the opening bell on Tuesday, February 12, 2019.

Street consensus is expecting $0.03 in earnings per share on $1.21 billion in revenue (per IBES by Refinitiv) for an expected year-over-year 4th quarter decline in revenue of 11% on a $0.00 EPS compared to Q4 '17.

Briefing.com is showing a $0.04 EPS estimate and $1.3 bl in expected revenue for UAA for Q4 '18, so we'll see if the numbers are adjusted before Tuesday morning.

Here is why the rewriting of War & Peace isn't required for Tuesday's release: in mid-December '18, Under Armour management held their investor meeting and guided 2019 to estimated EPS of $0.31-0.33 vs. the then-consensus of $0.35 in EPS, and revenue growth of 3-4% versus the then expected +4.9% consensus on gross margin expansion in 2019 that is expected to be higher by a little less than 1%.

Have expectations for the sports apparel and footwear giant changed materially in the last 7 weeks? Probably not.

UAA was trading at $21 on the day of the pre-announcement and closed Friday, February 8th at $20.75 per share so the stock has appeared to all but ignore the contained 2019 guidance at this point.

What has changed about Under Armour since the stock was crushed from a high of $52 in late 2015 to a low of $12 in late 2017?

1.) Last quarter UA/UAA generated $200 million in 4-quarter trailing free-cash-flow and also generated its 6th quarter (of the last 7 quarters) in positive free-cash-flow, after generating negative free-cash-flow for the previous year and a half.

2.) Slower growth is helping: the Under Armour "bug" was phenomenal from 2009 to 2015 thanks to remarkable growth where revenue and EPS grew 20-30% annually for several years. The demand for the brand seemed to be on fire, particularly at the college level.

3.) Apparel is now 68% of revenue, down from the mid-70% range during the halcyon days and looks to be averaging mid-single-digit growth the last 4 quarters, while footwear is roughly 20% of revenue and is much lumpier in its growth.

Here is the consensus EPS and revenue trends for 2019 and 2020:

2019 EPS est 2020 EPS est 2019 rev est 2020 rev est
2/10/18 $0.33 $0.49 $5,380 $5,700
1/13/19 $0.33 $0.49 $5,394 $5,746
12/31/18 $033 $0.49 $5,394 $5,735
11/30/18 $0.34 $0.50 $5,450 $5,766
10/31/18 $0.34 $0.49 $5,452 $5,764
9/30/18 $0.33 $0.50 $5,484 $5,857
8/30/18 $0.33 $0.49 $5,486 $5,963
7/31/18 $033 $0.50 $5,487 $5,864
6/30/18 $0.31 $0.52 $5,486 $5,949

Source: I/B/E/S by Refinitiv

Readers can see how EPS has remained fairly stable since the July '18 financial release while 2019 revenue was sliced between November and December '18 (no doubt as a result of the investor meeting update) and 2020 revenue has continued to trend lower as well.

It is good that Under Armour is showing margin control and discipline by keeping EPS stable as revenue estimates get revised lower, but all else being equal, going forward, I'd prefer to see revenue estimates start to stabilize for 2019 and 2020.

Under Armour Valuation:

metric
2020 P.E 41x
2019 P.E 61x
2020 exp EPS gro rt 50%
2019 exp EPS gro rt 48%
2020 exp rev gro rt 6%
2019 exp rev gro rt 4%
Price-to-sales (using est for q4) 1.8x
Price-to-book 5x
Price-to-cash-flow 26x
Price-to-free-cash 50x
FCF yield 2%
Div yield no div
Mstar long-term GM est 49%
Mstar long-term Op mgn est 9.2%
Mstar moat none

Source: valuation spreadsheet and Morningstar analysis

Summary/conclusion:

Maybe the best way to summarize Under Armour for the next few years is that it should return to growth, just a slower and more manageable growth rate accompanied by a somewhat more reasonable valuation.

Under Armour was the one stock that came up in meetings with client prospects in the middle part of this decade, and I told both current and prospective clients that 90x cash-flow is not the place to initiate a position in a stock.

We took a position near $30 per share, sold the shares, then bought near $20, sold the shares in the high teens, and then re-established the current position between $17 and $20 in the last year. At one point, given the state of the cash-flow statement, you had to wonder if Under Armour was going to survive.

At present, clients have a 1.6% position in the stock.

For those looking to manage risk, a trade below $17.10 or the early 2019 low for UAA would not be well received.

The upside is likely contained in the high $20's by a breakdown gap from the January '17 earnings release.

The real question remains did a chastised and somewhat humbled Under Armour management team "underpromise" but plan on over-delivering with fiscal 2019 guidance or at some point can we expect stable to positive revisions in the Under Armour revenue estimates after seeing the steady drumbeat in downward revisions?

Going forward, for the next few quarters, the 2019 and 2020 revenue estimates have my attention.

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.