UAA - Under Armour: Magical Discount Won't Last Forever

2023-11-22 16:52:37 ET

Summary

• Under Armour reported weak results but the stock rallied, indicating bullish sentiment.
• The company has inventory levels back in line with sales, and new products in the pipeline could drive meaningful growth.
• The stock trades at only 0.5x FY24 sales targets, far below industry levels.

Under Armour ( UA , UAA ) reported relatively weak results a few weeks back and the stock rallied. Anytime a company cuts estimates and the stock rallies is a bullish sign. My investment thesis remains ultra bullish with the stock trading at the lows while the retail environment is unlikely to be worse next year.

Another Cut

The athletic apparel company reported mixed results for FQ2'24 back on November 8 as follows:

Under Armour beat analyst estimates, but revenue guidance for FY24 was cut due to ongoing weakness in the North American market. Revenues are now forecast to dip 2% to 4% in the current FY.

The key though is that the company guided up gross margins, which is seen as a crucial sign that Under Armour can return to selling at the premium price points above Nike ( NKE ) prices. Gross margins jumped 260 basis points to 48.0% driven by a huge boost from supply chain benefits after a year of high costs. Under Armour had only forecast a FY24 gross margin of 25 to 75 basis points above the low 44.9% margin in FY23, but the new goal is for a margin boost of 100 to 125 basis points.

The athletic apparel company had boosted margin numbers to above 50% in the early days of COVID to separate from the mid 40% levels of Nike, but supply chain issues snarled plans. If Under Armour can return back to 50%-plus gross margins and return to sales growth, the stock could return to the 2019 and COVID highs of ~$27.

A prime reason to think the margin story will improve in 2024 is the inventory levels back in line with sales. Under Armour correctly managed inventory levels at the early stages of the COVID boost, but the company got the situation wrong last year due to not realizing Nike and other peers were stuck with excess inventories. Now, Under Armour has cut inventory levels to only $1.1 billion heading into the holidays while sales are at peak levels.

At the same time that Under Armour has the inventory picture back under control, as does Nike, the company has a ton of new products in the pipeline to eventually change the view of the athletic apparel company. At some point, the Curry brand and new products such as slip speed shoes and unstoppable fleece collections will drive meaningful growth.

The Jordan Brand division of Nike delivers more sales alone than the whole Under Armour. The company just does $351 million in quarterly footwear sales and upside potential in this area is substantial with the new CEO already driving a 40% boost in footwear mall penetration.

The new product innovation and expansion in the Curry brand has driven a lot of product heat. Despite the progress, Under Armour still isn't a footwear target of consumers, nor are products like Curry shoes regularly available at mall locations and prime wholesale accounts.

Magical Discount

Under Armour only has a market cap topping $3 billion now with revenues approaching $6 billion. Nike is worth $162 billion with revenues of $50-plus billion.

Every dollar of sales at Nike is worth $3 to investors while every dollar of sales at Under Armour is only worth 50 cents. The athletic apparel company has the higher gross margins, which ultimately should lead to the better valuation multiple for sales in the future.

Under Armour made significant progress in improving operations until the Covid volatility left investors again concerned the company wasn't innovating anymore. Under Armour only needs to start producing limited growth to alter investor sentiment for a business already generating $300-plus million in operating income.

Takeaway

The key investor takeaway is that the stock has a magical discount here. Under Armour is valued far below peer multiples, yet the company is separating the business with far higher margins. When investors regain confidence in the stock, Under Armour has substantial upside potential with early signs the market is catching on to the reversal.

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