It has been about a month since the last earnings report for Under Armour (UAA - Free Report) . Shares have added about 0.6% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Under Armour due for a pullback? 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 catalysts.
Under Armour Tops Q1 Earnings & Sales, Updates FY View
Under Armour, Inc.’s first-quarter 2019 earnings and revenues improved year over year and also came ahead of the Zacks Consensus Estimate. In fact, the first quarter marked the company’s sixth and third straight quarter of top and bottom-line beat, respectively. The athletic apparel maker also raised its 2019 earnings view.
The results were driven by sturdy performance across Asia-Pacific, EMEA and Latin America regions that helped offset dismal performance in North America. The impressive quarterly results and an encouraging view seem to have raised investors’ confidence.
Let’s Delve Deep
Under Armour’s quarterly earnings came in at 5 cents a share. The Zacks Consensus Estimate for the quarter under review was of breakeven. The company had reported loss per share of 7 cents in the year-ago period. On an adjusted basis, the company had reported break-even results in the prior-year quarter. The year-over-year upside can be attributed to higher revenues, improved gross margin, fall in SG&A expenses and lower interest expense.
Net revenues rose 1.6% (or up 3.1% on a currency neutral basis) to nearly $1,204.7 million, which surpassed the Zacks Consensus Estimate of $1,184.5 million. We note that while wholesale revenue jumped 5% to $818 million, direct-to-consumer revenue fell 6% to $331 million.
Wholesale business gained from international business and marginal growth in North America. Direct-to-consumer revenue, which accounted 27% of total revenue, fell due to sluggish demand and impacts from shift toward more premium price points and lower levels of discounting.
Apparel revenue inched up 0.7% year over year to $774.6 million, while Footwear revenue increased 7.6% to $292.5 million. However, revenue from accessories category declined 11% to $82 million due to planned reduced sales of backpacks and bags associated to a strategic relaunch of key product. Meanwhile, Licensing revenue plunged 17.8% to $21.7 million, whereas the company’s Connected Fitness segment reported an increase of 4.4% to $30.1 million.
Net revenues from North America fell 2.8% (down 2.4% on a currency neutral basis) to $843.2 million. Remarkably, international business continued to witness sturdy growth, rising 12.3% (up 17.2% on a currency-neutral basis). Within international business, net revenues from EMEA and Asia-Pacific regions grew 3.5% and 24.9% to $134.1 million and $144.3 million, respectively, while Latin America revenues increased 5.7% to $49.2 million.
The company’s gross margin expanded 100 bps to 45.2%, courtesy of improved regional mix and lower product costs. SG&A expenses fell 1% to $509.5 million, while, as a percentage of net revenues, the same contracted 110 bps to 42.3%. Net interest expense fell sharply about 50.5% to $4.2 million.
Other Financial Details
Under Armour ended the quarter with cash and cash equivalents of $288.7 million, long-term debt (net of current maturities) of $590.4 million and total shareholders' equity of $2,049.8 million. While cash and cash equivalents increased 2%, total debt was down about 36%. Additionally, management expects to incur capital expenditures of approximately $210 million in 2019.
Management continues to envision 2019 net revenues increase of 3-4%. Revenues from North America are likely to remain flat. The company projects international revenues to increase in low-double digit percentage rate. The company now forecast earnings per share in the band of 33-34 cents a share versus the prior projection of 31-33 cents. This shows year-over-year increase from 27 cents reported in 2018.
Under Armour now expects gross margin to improve 70-90 bps from the 2018 adjusted figure. The expansion is likely to be backed by favorable channel mix, stemming from reduced planned sales to off-price networks and increased proportion of direct-to-consumer sales. Also, reduced product expenses, owing to supply-chain efforts and lower airfreight are expected to boost gross margin. The company had earlier projected gross margin improvement of 60-80 bps Operating income is now anticipated to be around $220-$230 million compared with the earlier guided range of $210-$230 million. The company projects net interest and other expenses of $35 million.
For the second quarter, management expects revenue to be increase in the range of 1-2% driven by growth in international and direct-to-consumer businesses, partly offset by a marginal decline in North America business. Gross margin is projected to expand about 80-100 basis points due to improved product cost and regional and channel mix benefits. SG&A expenses are expected to be up about 4-5%, driven by additional planned marketing coupled with increased facility, distribution and store expenses. Under Armour projects an operating loss of approximately $25 million. The company now anticipates loss per share of roughly 6 cents, which shows an improvement from a loss of 8 cents reported in the year-ago period.
How Have Estimates Been Moving Since Then?
Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -47.87% due to these changes.
At this time, Under Armour has an average Growth Score of C, a grade with the same score on the momentum front. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Under Armour has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.