The branded sports apparel and footwear manufacturer Under Armour Inc. (UAA) has made a strong comeback since the early days of the coronavirus pandemic. The stock has gained more than 190% since hitting its 52-week low of $7.15 on May 14. This can be attributed to rising demand for sportswear over the past few months as people have grown more health conscious amid the pandemic and lockdown conditions. The stock hit its 52-week high of $21.05 yesterday.
Although UAA has demonstrated business resiliency over the past year, we think its long-term prospects look bleak.
We expect the following factors to influence UAA’s performance over the next couple of months:
Structural Changes to Accommodate Changing Industry Backdrop
The sports apparel industry has been executing a significant turnaround over the past few months to accommodate changing lifestyles and retail shopping patterns. McKinsey and Co. has identified “Athleisure” as one of the key trends that will define the sportswear industry in 2021. In addition, e-commerce sales are expected to trump in-store sales even after the pandemic departs , given the convenience of online shopping.
UAA has taken necessary steps to capitalize on this changing trend. The company plans to focus on direct-to-consumer sales through e-commerce channels and wholly owned physical stores. To that end, the company plans to reduce its third-party services and shut down several franchise stores across the country.
On December 18, UAA sold its MyFitness Platform to Francisco Partners for approximately $345 million. The proceeds from the sale are expected to fund the company’s long-term plans to consolidate its supply chain. In fact, this step is emblematic of the company’s commitment toward its goal of becoming the best-in-class retailer with a focus on consumer direct engagement.
Underwhelming Financials
Despite being the fourth largest sports apparel brand in the world in terms of revenue and brand recognition, UAA has not been able to deliver financial growth consistent with this ranking. The company’s revenue has declined at a CAGR of 2.9% over the past three years, while its EBITDA fell at a CAGR of 36.5% over the same period. However, its total assets increased at a CAGR of 5.6% over the past three years.
UAA’s revenues have increased slightly year-over-over to $1.43 billion in the third quarter ended September 30, 2020. However, its gross profit and net income declined from their year-ago values over this period. Its EPS declined 60.9% from the same period last year to $0.09.
Poor Growth Prospects
Analysts expect UAA’s EPS to decline 170% in the fourth quarter ended December 31, 2020, and at a rate of 4.5% per annum over the next five years. The company’s revenue is expected to decline 12.3% in the about-to-be-reported quarter, and 17.9% in fiscal 2020.
Price Target and Analyst Ratings Do Not Indicate Potential Upside
Analysts expect UAA to hit $16.32 soon, representing a potential downside of 21.2%. Moreover, of 32 Wall Street analysts that rated the stock, only five rated it “Strong Buy.”
POWR Ratings Don’t Look Promising
UAA has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
Our proprietary rating system evaluates each stock on eight different categories. UAA has a B grade for Sentiment. It has a grade of C for Momentum, Quality and Stability. Though the company has a trailing 12-month gross profit margin of 47.6%, its net income margin, ROE and ROA values are negative.
In the 33-stock Athletics & Recreation industry, UAA is ranked #30. You can check out additional POWR Ratings for Growth and Value here.
Better than UAA: Click here to learn about top rated stocks in the Athletics & Recreation industry.
Bottom Line
While we believe UAA is taking adequate steps to solidify its dominance in the sports apparel and footwear industry, the company’s sub-par financials could limit its growth. As a result, we think it is advisable to wait until the company can generate sturdy profits.
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UAA shares were trading at $21.15 per share on Tuesday afternoon, up $0.38 (+1.83%). Year-to-date, UAA has gained 23.18%, versus a 4.46% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.
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