A month has gone by since the last earnings report for Under Armour (UAA - Free Report) . Shares have lost about 33.2% 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 Q4 Earnings Meet, Sales Miss
Under Armour, Inc. reported fourth-quarter 2019 results, wherein the top line missed the Zacks Consensus Estimate, while the bottom line met the same. The company’s cautionary statement that the coronavirus outbreak in China is likely to hurt first-quarter 2020 sales also hurt the stock. Moreover, this athletic apparel maker did not provide an encouraging view for 2020, and expects soft sales in North America.
Nonetheless, we note that both the top and the bottom-line improved year over year. The Baltimore-based company reported adjusted earnings of 10 cents a share that came a penny ahead of the prior-year quarter’s tally. Higher net revenues, lower cost of goods sold and reduced interest expense favorably impacted the bottom-line performance.
Net revenues grew 3.7% (or 4.1% on a currency neutral basis) to nearly $1,441.2 million but fell short of the Zacks Consensus Estimate of $1,464.8 million, after surpassing the same in the preceding quarter. Both direct-to-consumer revenues and wholesale revenues increased 2%.
Apparel revenues inched up 0.2% year over year to $970.3 million, while Footwear revenues increased 10.3% to $259.3 million. Revenues from Accessories category grew 1.6% to $109.9 million. Meanwhile, Licensing revenues soared 35.5% to $62.2 million, whereas the company’s Connected Fitness segment reported an increase of 15.6% to $35 million.
Net revenues from North America rose 1.9% to $983 million. Remarkably, international business continued to witness decent growth, rising 6.6% (or up 8% on a currency-neutral basis). Within international business, net revenues from EMEA and Asia-Pacific regions grew 2.2% and 9.8% to $180.7 million and $183 million, respectively. Notably, Latin America revenues surged 11.8% to $55 million.
The company’s gross margin expanded 230 bps to 47.3%, driven mainly by pricing including lower discounts to wholesale partners, channel mix and supply chain efforts. SG&A expenses grew 3.4% to $607.5 million, however, as a percentage of net revenues, the same decreased 20 bps to 42.1%. Net interest expense fell sharply about 26.6% to $5.4 million.
Other Financial Details
Under Armour ended the quarter with cash and cash equivalents of $788.1 million, long-term debt (net of current maturities) of $592.7 million and total shareholders' equity of $2,150.1 million. While cash and cash equivalents increased 41.4% year over year, total debt was down about 18.7%. Management incurred capital expenditures of about $54 million. Additionally, management expects to incur capital expenditures of approximately $160 million in 2020 compared with $144 million in 2019.
Given the current scenario in China, Under Armour now expects first-quarter 2020 revenues to be hit by approximately $50-$60 million. Management expects revenues to be down about 13-15% during the first quarter. Gross margin is projected to improve about 120-140 basis points during the quarter on account of decrease in sales to the off-price channel and supply chain. The company now envisions operating loss of approximately $75-$80 million and loss of 14-15 cents per share for the quarter.
Management now envisions 2020 net revenues to be down at a low single-digit percent. This indicates a mid to high-single-digit percentage decline in North America but a low double-digit percentage increase in international business.
The company now expects earnings between 10 cents and 13 cents a share for 2020, inclusive of an estimated 1-2 cents adverse impact on account of equity interest in Japan licensee. The earnings projection is far below the adjusted earnings of 34 cents a share reported in 2019.
Management expects wholesale revenues to be down at a low to mid-single-digit rate and DTC to be up at a low-single-digit rate in 2020. Under Armour forecasts Licensing revenues to be down nearly 30% on account of lower contractual royalty minimums driven primarily by Japanese business, the termination of certain licensees, and contract settlements realized in 2019. Connected fitness business is projected to be up at a high-single-digit rate. The company envisions apparel and accessories to be down at a low-single-digit rate and footwear to grow at a low-single-digit rate for the year.
Under Armour now anticipates full-year gross margin to improve 30-50 bps. The expansion is likely to be backed by regional mix benefits and supply chain endeavors. Operating income is projected to reach between $105 million and $125 million, sharply down from $236.8 million reported in 2019. The company estimates net interest and other expense of $30 million.
The company also plans to undertake restructuring initiative to rebalance cost base in order to enhance profitability and cash flow generation. This could include approximately $325-$425 million of pre-tax restructuring related charges, of which roughly $225-$250 million is related to potentially forgoing opening a flagship store in New York City. Management anticipates pre-tax benefits of approximately $30-$50 million in 2020 based on initial assessments and timing of a potential restructuring initiative.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -311.54% due to these changes.
Currently, Under Armour has a strong 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 C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. 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. It's no surprise Under Armour has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.