A month has gone by since the last earnings report for Under Armour (UAA Quick QuoteUAA - Free Report) . Shares have lost about 10.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Under Armour due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Under Armour Posts In-Line Q1 Earnings, Trims FY23 View

Under Armour, Inc. came up with first-quarter fiscal 2023 results, wherein the top line came ahead of the Zacks Consensus Estimate, while the bottom line met the same. The impact of supply chain disruptions and higher than planned promotions was visible in the sportswear maker’s quarterly results, as gross margin contracted sharply. Also, the company’s Asia Pacific business remained sluggish. As a result, the company trimmed its fiscal 2023 earnings view.

Revenues & Earnings Picture

Under Armour reported first-quarter fiscal 2023 adjusted earnings of 3 cents a share that matched the Zacks Consensus Estimate, thank to better expense management. However, the figure declined sharply from adjusted earnings of 24 cents a share reported in the year-ago period due to margin contraction.

Meanwhile, net revenues of $1,349.1 million came ahead of the Zacks Consensus Estimate of $1,338 million but declined marginally by 0.2% on a year-over-year basis. The result included an approximate 10 basis points of headwind related to the proactive cancellations of order on account of supply constraints because of the pandemic. Net revenues grew 2% on a currency-neutral basis.

While wholesale revenues increased 3.1% year over year to $791.7 million, direct-to-consumer revenues fell 7.1% to $520.8 million owing to an 8% decline in owned and operated store revenues, primarily by because of lockdowns in China. E-commerce revenues decreased 6% and represented 39% of the total direct-to-consumer business.

Let’s Take an Insight

By product category, Apparel revenues edged down 0.7% year over year to $868.4 million, while Footwear revenues increased 1.3% to $347.3 million. Revenues from the Accessories category declined 13.2% to $96.8 million due to planned lower sales of SPORTSMASK compared to last year. Meanwhile, Licensing revenues surged 21% to $28.1 million, driven by timing and recognition of minimum guaranteed royalty payments in the APAC region, and solid performance in Japanese business.

Net revenues from North America inched up 0.4% to $909.4 million. Revenues from international business declined 3.3% (or up 1.5% on a currency-neutral basis) to $431 million. Within international business, net revenues from EMEA decreased 1% to $205.2 million due to logistical challenges. We note that revenues from Asia-Pacific declined 8.2% to $176.7 million due to lockdowns in China, while revenues from Latin America region grew 6.3% to $49.4 million.

The company’s gross margin shrunk 280 basis points to 46.7% from the prior-year period owing to elevated freight costs related to COVID-19 supply chain impacts, higher than planned promotions, and the adverse impact of changes in foreign currency.

SG&A expenses jumped 9% to $595.7 million due to planned marketing investments carried forward from transition quarter, as well as higher workforce wages due to last year's teammate compensation increases, legal expenses related to on-going litigation matters along with higher consulting and technology related spending.

Meanwhile, adjusted operating income of $44.5 million was significantly down from $124.2 million reported in the year-ago period.

Other Financial Details

Under Armour ended the quarter with cash and cash equivalents of $1,049.4 million, long-term debt (net of current maturities) of $672.8 million and total stockholders' equity of $1,729.1 million. Inventory was up 8% to $954.4 million. For fiscal 2023, management expects capital expenditures to be approximately $225 million.

During the quarter, the company repurchased shares worth $25 million, and had $175 million remaining under its share buyback program.

Outlook

Under Armour continued to expect 5-7% increase in fiscal 2023 revenues. Excluding roughly 200 basis points of anticipated foreign currency headwinds, the company guided 7-9% increase in revenues, on a currency-neutral basis. This expectation includes approximately three percentage points of headwinds related to strategic decision to cancel orders affected by last fall's capacity issues and supply chain delays, along with the impacts of the COVID resurgence in China.

Management now foresees gross margin contraction of 375 to 425 basis points compared to the baseline period's gross margin of 49.6%. The decline is mainly driven on expectations of higher promotional activities, channel mix, and additional negative impacts from anticipated changes in foreign currency. The company had earlier forecast 150 to 200 basis points decline in gross margin.

SG&A expenses are expected to be flat compared with the prior year. Under Armour guided operating income between $300 million and $325 million versus the comparable baseline period operating income of $333.4 million. The company had earlier projected operating income in the range of $375 to $400 million.

Excluding an expense related to ongoing litigation matters, the company forecast adjusted operating income in the band $310 million to $335 million for fiscal 2023 versus the comparable baseline period adjusted operating income of $424 million.

Under Armour now expects adjusted earnings in the band of 47-53 cents a share, down from its previous call of 63-68 cents a share. The company had reported adjusted earnings of 68 cents a share for the comparable baseline period.

For the second quarter, Under Armour expects revenues to be flat to up marginally on a reported basis, and up at a low-to-mid single digit rate on a currency neutral basis. This includes about five percentage points of headwinds from proactive reductions and cancellations to order book due to COVID-19 related supply constraints.

The company foresees gross margin contraction of approximately 550-600 basis points in the second quarter due to adverse impact from elevated promotional activities, higher freight expenses, shifts and channel mix, and increasing pressures from changes in foreign currency. SG&A expenses are expected to be flat to marginally down in the second quarter.

Management expects second-quarter operating income between $105 million and 115 million, down from adjusted operating income of $188.8 million in the year-ago period. It anticipates earnings in the band of 15 cents to 17 cents a share, down from adjusted earnings of 31 cents reported in the prior-year quarter.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

The consensus estimate has shifted -34.18% due to these changes.

VGM Scores

Currently, Under Armour has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Under Armour has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.