Under Armour Inc. (UA) released its financials for Q4 2018 before the bell Tuesday, and investors acted surprisingly fickle over the better-than-expected results. Shares of the fitness apparel company constantly whipsawed into the red and black during the session before eventually ending the day as one of the S&P 500’s top gainers.
Despite Under Amour’s solid growth, the company still lags far behind global leaders like Nike Inc. (NKE) and Adidas AG (ADDYY). While that may scare off some market participants, several analysts believe the stock poses strong upside potential, which requires some consideration among retail investors.
Here’s how Under Armour fared during the October-December period – and what these results say about the stock’s potential rally ahead…
The News
The firm posted big top- and bottom-line financials that surpassed analyst expectations, despite the fact that some investors opted to focus on declining sales in the U.S. market.
Earnings per share (EPS) came in at $0.09, more than doubling Wall Street’s estimate of $0.04. That marked a stunning turnaround from the loss of $0.20 per share reported in the year-ago period, which resulted from a single $39 million charge stemming from new tax legislation. The company reported overall sales of $1.39 billion, up 1.5% from Q4 2017 and edging analysts’ $1.38 billion estimate.
The Q4 numbers became more interesting as the report went deeper into regional sales. In the company’s home U.S. market, sales dropped a surprising 6% year-over-year to $965 million. On the other hand, international sales popped 28% to $395 million after adjusting for exchange rates. Those overseas sales now account for 28% of Under Armour’s total revenue.
As for guidance, the firm expects sales to remain “relatively flat” at 3% to 4% in U.S. and Canadian markets. This is in line with previous targets as the company plans to focus more on current product investment than new product investment through 2020.
How Investors Reacted
Shares of UA were all over the place from the opening bell onward as investors were split on the better-than-expected EPS and declining U.S. sales.
The stock surged more than 5% during premarket hours only to fall nearly 3% below the previous close to $18.65 by the market open. Shares quickly rebounded into the black and stayed aloft for most of the session, peaking at $20.41 before closing slightly lower at the $20 baseline for a roughly 7% gain on the day.
When the closing bell rang, UA stock ranked among the S&P’s top five performers for the day. It lagged right behind IPG Photonics Corp. (IPGP), D.R. Horton Inc. (DHI), Coty Inc. (COTY), and Brighthouse Financial Inc. (BHF), which saw daily returns of 7.2%, 7.5%, 12.5%, and 13.9%, respectively.
The Bigger Picture
Under Armour’s narrative can’t be understood without considering the narratives of its gargantuan competitors: Nike, often considered the largest and most recognizable brand on the planet; and Adidas, which has long dominated Europe but is now stealing Nike’s North American market share following a more than 20% sales growth rate over the last two years.
Under Armour has long been the small runt of the litter, and CEO Kevin Plank once attributed the problem to the fact that his company’s products simply aren’t cool enough yet. In his Q4 2016 earnings call, Plank explained that his primary goal was to make his apparel more fashionable because “the consumer wants it all. They want product that looks great, that wears great, that you can wear at night with a pair of jeans, but that also does perform for them.”
Plank sought to remedy this lack of appealing “athleisure” through a series of product launches that have missed more than hit. The Steph Curry shoe line, which was the company’s largest launch at the time as well as a mammoth deal with the most sought-after athlete in the world, was widely ridiculed for resembling “nurse shoes.” Shares of UA plunged more than 7.3% in November 2016 when Foot Locker CEO Dick Johnson commented that Curry 3 sales “started off a bit slower than previous models.”
Last quarter appeared to be a time of reflection for the company, which took that time to slash excess inventories by 12% and discontinue items that haven’t been selling. The housecleaning seems to have worked as Tuesday’s earnings report reflects solid growth and a return to bullish sentiment for the time being.
A slew of recent analyst upgrades reflect this bullish sentiment, with several banks promoting generously high price targets for a stock that’s been exceptionally volatile in recent years. Randal Konik of Jefferies Financial Group said after Tuesday’s earnings call that gross margins should improve as inventories continue to be slashed. He issued a “Buy” rating on UA stock and set a price target of $28 a share, indicating a 40% return from Tuesday’s $20 closing price. Erinn Murphy of Piper Jaffray Companies (PJC) similarly cited improving gross margins as the key growth driver, in addition to a reduction in promotional activities that would drive up costs. She issued an “Overweight” rating and a $30 price target, up 50% from the $20 close.
Looking Ahead
Under Armour clearly experienced the growing pains of any new company trying to run with the bulls: failed product launches, questionable brand reach, and periodic dips in sales, to name a few. But Plank seems to be bringing his company out of that phase as he strategizes cost-cutting measures in the short term so he can return to the drawing board with more attractive products.
These efforts haven’t gone unnoticed by analysts, and Under Armour’s grappling with a landscape flush with competition looks to be an upside for UA investors. With the wind looking to be at its back, Under Armour is poised to flourish in 2019, which could leave patient investors with a solid profit along the way.