At the least, Under Armour Inc (NYSE:UAA) stock managed to avoid an all-out crisis with its first-quarter earnings report. And that was enough to send UAA stock skyward, up more than 10% in Thursday’s premarket trading.
Under Armour recorded a net loss of a penny per share in its fiscal Q1 — a flip from a small net gain last year, but 3 cents better than the 4-cent loss Wall Street was expecting. Better still, revenues grew 7% to finish ahead of estimates.
The premarket gains make sense. UAA stock tanked after each of the last two Under Armour earnings reports, and fell by about half in the process. Anything that wasn’t a disaster qualified as a sequential improvement. And there was some good news in the release, notably in terms of international growth.
That said, Under Armour’s problems aren’t solved, given that Q1 generally is a lower-revenue quarter and given a number of concerns below the headlines. Under Armour stock might get closer to normal after this report … but an all-out rebound is still a few quarters away. after Q1. But an all-out rebound remains a few quarters off.
Under Armour’s Earnings Were Good … Not Great
Under Armour earnings certainly benefited from low expectations. The net loss of 1 cent beat analyst expectations, but it also represented the company’s first net loss in at least a decade.
Meanwhile, what revenue growth Under Armour did drive came solely from overseas. North American sales actually declined 1% year-over-year.
In the release, Under Armour pointed out that “new distribution was more than offset by the absence of business lost to bankruptcies in 2016.” In other words, Under Armour lost more sales from the closures of Sports Authority and other smaller chains than it generated from new agreements with Kohl’s Corporation (NYSE:KSS) and DSW Inc. (NYSE:DSW). That implies that early sales at those chains were lower than expected – a key analyst concern heading into earnings.
Meanwhile, gross margin increased and SG&A deleveraged, leading operating income down some 78% year-over-year. Notably, inventories spiked 8% ahead of Q2 — historically the weakest quarter for Under Armour earnings and sales.
Investors will be listening to the earnings call to determine whether that’s a sign of management optimism — or more product headed for the discount bin.
Heading into the quarter, I was concerned that the company had a serious branding problem. The distribution agreements with Kohl’s and DSW made little sense on their face. Under Armour is a brand predicated on “cool.” Their demographics of middle-class moms and children hardly seemed the right customers to reinvigorate the Under Armour brand.
The same goes – for better or for worse – for Under Armour’s efforts to move into women’s apparel. A brand predicated on use by high-performance, tough, male athletes (remember “Protect This House”?) is trying to enter a market led by companies like yoga-themed Lululemon Athletica Inc. (NASDAQ:LULU).
It’s a narrow tightrope to maintain that underdog-like branding while also moving toward fashion and (whether fair or not) women’s apparel and footwear.
Moving from a niche player to a diversified provider isn’t easy in any industry, particularly in the modern apparel climate. Nike Inc (NYSE:NKE) managed that transition — one major reason it’s a $90 billion company. But even that industry behemoth has seen its growth decelerate.
There’s simply not enough in the quarter to offset those concerns.
Under Armour maintained full-year guidance for a double-digit increase in revenue. Hitting that target clearly would be a step in the right direction. But operating income is still guided down 24% for the year after just 3% growth a year ago. Margin pressure clearly remains an issue. The Kohl’s and DSW deals still have the potential to hurt full-price selling elsewhere — including online.
And the true test for UAA stock arrives in the second half of the year, when Under Armour derives ~58-60% of revenue, and the majority of its full-year earnings.
Still Good News for UAA Stock
Overall, Under Armour earnings do change the narrative here. The company at the least will get a bit more leeway from investors, and less pressure on its turnaround efforts.
And from a long-term standpoint, Under Armour isn’t doomed. The company still has time to get its branding right and get sales back on track. Bear in mind Nike had some growing pains, too. Sweatshop accusations significantly damaged the brand in the late 1990s, and a 2000 article from Bloomberg quoted an analyst saying that “people are losing patience” in Nike’s turnaround.
Investors lost some patience in UAA stock over the past few months, too. The Under Armour earnings report likely will calm many of those investors.
But with Under Armour stock now trading at 40x-plus 2017 EPS, the company still has a lot of work left to do.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.