Investors May Be Wrongly Hating Under Armour Ahead of Earnings
Boy, investors have really dumped some hatorade on top of Under Armour's (UA) - Get Report once-hot stock ahead of its second-quarter earnings release Tuesday.
Shares of the athleticwear maker, at around $43, have fallen about 9% over the past three months compared to a 3.5% gain for the S&P 500. The pullback hasn't come without good reason -- or several of them, to be more precise.
Under Armour slashed its full-year sales-and-profit outlooks in late May after key partner Sports Authority decided to shutter all of its stores across the U.S. Under Armour now expects full-year sales to increase about 24% from the prior year to $4.925 billion and operating income to be in a range of $440 million to $445 million. Previously, Under Armour anticipated revenue to increase 26% and operating profit of $503 million to $507 million.
Sports Authority's bankruptcy has raised concerns about Under Armour's second-quarter profit being weaker than Wall Street expects due to close out deals at the now defunct sporting goods chain. The retailer's disappearance may also push Under Armour into more quickly entering lower profit margin distribution partners such as J.C. Penney (JCP) - Get Report and Kohl's (KSS) - Get Report as a way to make up for lost sales from Sports Authority.
As TheStreet recently reported, an announcement by Under Armour that it will enter either Kohl's or J.C. Penney before the holiday season could be looming.
Meanwhile, Under Armour has had to sit back and watch its superstar endorsers -- whose winning ways fueled big-time product sales in 2015 and subsequent investor appetite -- deal with a series of heartbreaking disappointments. Stephen Curry's Golden State Warriors -- up 3-1 in the NBA Finals -- lost in dramatic fashion to LeBron James' Cleveland Cavaliers. Not making the outcome any better for league MVP Curry was that he often had little impact during the seven-game series, which led to talk of him possibly dealing with injuries and mental fatigue.
Golfing phenom Jordan Spieth is arguably having a poor year by the high standards he set in 2015. Spieth finished tied for 30th at the British Open this month, following a 39th place showing at U.S. Open in June. The lackluster finishes followed his failed bid at becoming the fourth-ever player to repeat as Masters champion in April.
Under Armour could get a boost from a wider roll-out of 3-D printed sneakers. Some test samples above.
The letdowns have fueled speculation on the Street that Under Armour's sales -- particularly in footwear -- will slow drastically later this year. If there has been a positive of late, it's that Curry's much ridiculed new sneaker -- the "Chef Curry" -- has seen brisk demand.
But with what may go down as an uncharacteristically weak quarter for Under Armour out of the way, investors could be missing a buying opportunity if they continue to be too bearish.
"With the Sports Authority sales impact already embedded in the stock, we believe the risk/reward for Under Armour is favorable going into the second half of 2016 and 2017 as gross [profit] margins rebound, inventory normalizes, and sales comparisons ease," said Canaccord Genuity analyst Camilo Lyon in a note to clients ahead of Under Armour's earnings release. Lyon outlined several positive catalysts ahead for the company.
First is some 50% sales growth in footwear continuing for the "foreseeable future" due to new product introductions in the running, basketball and golf categories. As TheStreet reported in June, Under Armour's footwear business could receive a particular boost later this year from a wider roll-out of higher priced 3D printed sneakers -- an initial test of 3-D printed sneakers launched in March has been very successful, according to Under Armour.
Further, adds Lyon, Under Armour's apparel business should continue to grow at a "healthy" rate as the company builds upon new innovations such as Coolswitch and Microthread -- which promise to help body cooling during intense workouts -- while also launching new categories such as mountain sports (ski/snowboarding) this fall.
Lyon rates Under Armour shares a buy with a $65 price target.