A month has gone by since the last earnings report for Under Armour (UAA - Free Report) . Shares have lost about 21.1% 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 its most recent earnings report in order to get a better handle on the important drivers.
Under Armour Reports Narrower-Than-Expected Q2 Loss
Under Armour, Inc. reported narrower-than-expected second-quarter 2019 loss. Apparently, top-line miss and management’s soft view regarding North America segment were not well perceived by investors. This athletic apparel maker now envisions a marginal decline in North America revenue. The company had earlier anticipated revenue to be flat.
Let’s Delve Deep
Under Armour reported quarterly loss of 4 cents a share as against the Zacks Consensus Estimate of loss of 5 cents. This also fared far better than the loss of 8 cents incurred in the year-ago period. We note that slightly higher revenues, improved gross margin and lower interest expense might have aided the bottom-line performance. Notably, this was the fourth straight quarter of bottom-line beat.
Net revenues rose 1.4% (or up 3% on a currency neutral basis) to nearly $1,191.7 million but fell short of the Zacks Consensus Estimate of $1,198.9 million, after surpassing the same in the preceding six quarters.
We note that direct-to-consumer revenue (represents 35% of total revenue) increased 2% to $423 million. In spite of year-over-year increase, revenue came below expectations due to traffic and conversion challenges, mainly in North America. Wholesale revenue fell 1% to $707 million on account of planned lower sales to the off-price channel.
Apparel revenue decreased 1.1% year over year to $739.7 million, while Footwear revenue increased 4.7% to $284.1 million. Revenue from accessories category inched up 0.3% to $106.3 million. Meanwhile, Licensing revenue surged 19.5% to $25.3 million, whereas the company’s Connected Fitness segment reported an increase of 9.7% to $31.9 million.
Net revenues from North America fell 3.2% (down 2.9% on a currency neutral basis) to $816.2 million. Remarkably, international business continued to witness sturdy growth, rising 11.8% (up 17.1% on a currency-neutral basis). Within international business, net revenues from EMEA and Asia-Pacific regions grew 6.1% and 22.6% to $145.3 million and $154.1 million, respectively. However, Latin America revenues decreased 2.5% to $39.7 million due to change in Brazilian business model.
The company’s gross margin expanded 170 bps to 46.5%, courtesy of supply chain endeavors, regional mix and restructuring charges in the year-ago quarter. This was offset by foreign currency impacts. SG&A expenses grew 2.4% to $565.8 million, while as a percentage of net revenues, the same increased 50 bps to 47.5%. Net interest expense fell sharply about 30% to $6 million.
Other Financial Details
Under Armour ended the quarter with cash and cash equivalents of $455.7 million, long-term debt (net of current maturities) of $591.4 million and total shareholders' equity of $2,048.3 million. While cash and cash equivalents more than doubled year over year, total debt was down about 24%. Additionally, management expects to incur capital expenditures of approximately $210 million in 2019.
Management continues to envision 2019 net revenues increase of 3-4% based on 3-4% growth in both wholesale and DTC. The company projects international revenues to increase in low to mid-teen percentage rate (versus earlier projection of low-double digit percentage rate). The company forecast earnings per share in the band of 33-34 cents a share, including an adverse impact from the company's minority interest in its Japanese licensee. This shows year-over-year increase from 27 cents reported in 2018.
Under Armour expects gross margin to improve 70-90 bps from the 2018 adjusted figure. The expansion is likely to be backed by favorable channel mix and supply-chain efforts.
Operating income is now anticipated to be around $230-$235 million compared with the earlier guided range of $220-$230 million. The company projects net interest and other expense of $30 million versus previous estimate of approximately $35 million.
For the third quarter, management expects revenue to decline in the band of 2-3% on account of reduced sales to the off-price channel, softness in DTC business, and unfavorable timing of distributor sales in international regions. Under Armour expects revenue to be up at a low to mid-teen percentage rate during the final quarter of fiscal 2019.
Gross margin is projected to expand approximately 120-140 basis points during the third quarter, primarily due to channel mix benefits with lower off-price sales and supply chain initiatives including lower air freight and product cost improvements.
Third quarter operating income is expected to be in the range of $115-$120 million, with earnings anticipated between 17 cents and 18 cents a share. The company had reported adjusted operating income of $143 million and adjusted earnings of 25 cents in the prior-year period.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -31.23% due to these changes.
Currently, Under Armour has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 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.
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.