UAA - Under Armour: Another Gift

2023-05-10 04:26:04 ET

Summary

• Under Armour reported solid FQ4'23 numbers despite ongoing margin pressures.
• The athletic apparel company faces a tough start to FY24 due to elevated inventory levels leading to a continuation of the promotional activity.
• The stock is crazy cheap at 0.5x FY24 sales targets while the company produces better metrics than peers trading at a far higher multiple.

The current stock market is very bipolar where stocks trade more based on history than actual comparative results. Under Armour ( UA , UAA ) is a prime example of a stock struggling to impress the market with similar or not better results than market darling Nike ( NKE ). My investment thesis remains ultra Bullish on the athletic apparel stock trading at a massive discount to peers.

Disappointing Inventory Overhang

While Under Armour somehow navigated the apparel inventory issues hitting most companies in 2022, the athletic apparel company finds itself stuck with slightly too much inventory now. The company will have to continue the promotional environment slightly longer into 2023.

For FQ4'23, Under Armour reported financial metrics as follows:

The company grew revenues a solid 7.7% to $1.4 billion, which were up 10% on a currency neutral basis. Under Armour generated a solid $0.18 profit, though the company saw massive margin pressures continue into the March quarter.

Under Armour saw gross margins dip 310 basis points to 43.4%, down from prior levels that were pushing towards 50%. The company guided to only a 25 to 75 basis point improvement in the gross margin for FY24 from a FY23 rate of 44.9%.

The main culprit is that Under Amour ended up with inventory levels at $1.2 billion. The company saw inventory levels up 44% from the depressed levels of 2022, but the expectation was for the business to be booming by now while the U.S. economy could be heading into a recession.

On the FQ4'23 earnings call , CFO David Bergman highlighted the goal to normalized inventory levels around $1.0 billion:

Turning to inventory. As a reminder, our levels were especially lean through the summer of calendar 2022 due to our previous constrained strategy and supply chain disruptions from prior periods. Thus, we're still normalizing in our first quarter. Accordingly, we expect inventory to be up at a high 30s percentage rate at the end of Q1. A high single-digit rate at the end of Q2 and then decline in the second half of the year to end fiscal '24 around $1 billion.

Management guided to FY24 revenues only flat to up slightly following a year where revenues reached $5.9 billion. Under Armour has an inventory ratio of ~20% of forecasted sales placing the inventory level around normal ratios going back 10 years.

The only major issue with the inventory levels here is that the U.S. faces a potential recession impacting sales. Also, Under Armour isn't as international, especially focused on China, where growth will be higher this year.

Relative Strength

Under Armour entered 2022 with a huge relative strength in gross margins compared to Nike. The company was headed towards 50% margins before inventory issues from Nike led to huge promotional sales along with supply chain impacts.

Still, Under Armour has gross margins that top Nike and the company forecasts a rebound after weak margins in FQ1. The new CEO is pushing forward into the premium category with suggestions the company lacks premium products in key areas like gold, women's and the expansion into sport style.

While Under Armour is reporting mixed results due to the tough promotional environment, the athletic apparel company appears set to bleed off all excess inventory within the next few months. Within FY24, the company will return to more normalized growth and gross margins, setting up a rally in the stock.

Based on comparable growth and higher gross margins, Under Armour will ultimately generate the profits to warrant a similar P/S ratio, if not higher. Typically, the company capable of producing the higher gross margins are warranted with the higher valuation multiples.

Nike now trades at nearly 7x the forward P/S multiple of Under Armour despite being a prime cause of the promotional activity in 2022 due to excess inventory.

Takeaway

The key investor takeaway is that the athletic apparel company will eventually warrant a premium valuation. Under Armour predicts an end to the promotional environment in the current quarter, leading to higher profit margins in the future.

Investors should use the current weakness with the stock trading near the Covid lows as a great gift to load up on Under Armour.

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