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Under Armour Stock Likely to Continue Benefiting From Turnaround

On Thursday, when UA reports its results, the owners of UA stock will try to determine if the company can stay profitable going forward

Just a mere three years ago, Under Armour (NYSE:UAA, NYSE:UA) stock was practically uninvestable. Although UA benefited from its well-recognized brand, the athletic-apparel company was spending far too aggressively, and racking up too much debt.

The Big Pop In Under Armour Stock Is a Sucker’s Rally
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Under Armour stock was on the verge of what would end up being more than a 75% setback. Much has changed in the meantime.

Although Under Armour still  has an overwhelming level of debt, the debt is shrinking. The company appears to be spending more efficiently; its sales are growing without sacrificing its margins. And, perhaps best of all, UAA stock and its sister stock, UA, have been starting to rebound meaningfully for the first time in years.

It may be time to take a shot at Under Armour stock.

Waist-Deep in Unmerited Debt

UA is not a name that needs much of an introduction. Although Under Armour is not in the same league as powerhouse rival Nike (NYSE:NKE), and it’s still trailing Adidas (OTCMKTS:ADDYY), the Under Armour brand has made some waves in the athletic-apparel arena since the company’s inception in 1996.

But by 2017, when its top line had grown to $5.0 billion, it was sitting on $765 million worth of long-term debt and incurred $34 million of interest expenses that year.

That was also the year Under Armour swung back into the red on a GAAP basis, and reported serious earnings declines on a non-GAAP basis, with no end to that trend in sight.

Perhaps more than anything though, that was also the year investors gave CEO Kevin Plank a wakeup call, using a steep selloff of Under Armour stock. In short, the old way of doing business wasn’t going to work going forward.

The Old M.O.

UA’s old way of doing business was spending heavily to garner attention.

Under Armour paid sports stars massive sums of cash in exchange for their vocal and visible support of Under Armour’s product line.

NBA phenom Steph Curry, gold medalist swimmer Michael Phelps and newly-red-hot golfer Jordan Spieth were just some of the names to whom Under Armour offered eight and even nine-figure contracts, just to associate themselves with the brand. Under Armour even went as far as to create star-specific footwear like the Steph Curry line of sneakers. 

That expensive craze has since died down, as the fiscal benefit to Under Armour never became entirely clear.

The other branding and awareness strategy Under Armour has employed is sponsorship of teams and the stadiums they play in. In 2016, for instance, Under Armour shelled out $280 million to UCLA to become the name behind its athletes’ footwear for a 15-year stretch.

Revenue never quite caught up with the spending though, ultimately sending Under Armour stock into a freefall.

UA hasn’t made quite as many outlandish deals over the course of the past couple of years.

Why Under Armour Stock Rallied

Under Armour stock is up nearly 100% since its late-2017 low, and for good reason. The company’s overhaul is gaining traction.

Last year’s top line of $5.2 billion was up 4% from 2017’s tally, setting a new record. Still hovering around 45%.its gross margins are roughly the same as they were before the weight of aggressive spending passed the tipping point in 2017,  Total operating expenses have stabilized, but its revenue growth is still respectable. In Q3 and Q4,  UA’s  operating profit rose year-over-year.

Perhaps Under Armour doesn’t need celebrity endorsements and major sponsorships as much as it thought it did.

Most encouraging of all is the pace at which the company’s debt is being whittled away.

After peaking at $790 million in 2016, its long-term debt has been pared back to $704 million, and it should continue to drop.

The company is expected to post its first-quarter numbers on May 2, likely adding another chapter to what’s becoming a compelling turnaround story. As of the most recent look, analysts, on average, are calling for break-even EPS, and expecting a very slight YoY decline in revenue.

Those numbers aren’t going to be what makes or breaks Under Armour stock though. The figures investors will be watching are the ones that come between the top and bottom lines on the income statement. Specifically, they will be evaluating whether the athletic-apparel maker can continue to sell its goods without spending gratuitously to make it happen.

Heading into UA’s earnings, it certainly looks as if it can.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.

Article printed from InvestorPlace Media, https://investorplace.com/2019/04/under-armour-stock-turnaround/.

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