- Under Armour will report its Q1 2016 earnings on Thursday, 21st of April.
- Analysts expect Under Armour to report an EPS of $0.02 on a revenue of $1.03B.
- Under Armour stock will face heavy downside pressure if it misses on revenue.
The sportswear and casual apparel maker Under Armour (NYSE:UA) is scheduled to report its earnings on Thursday, 21st of April. Analysts expect Under Armour to report an EPS of $0.02 on a revenue of $1.03B. This represents revenue growth of 28%. Under Armour has a strong earnings surprise history, with an earnings beat in all the previous four quarters.
The company is having a very eventful month. Under Armour has recently undergone a massive restructuring in its ownership structure. The company had issued a new class of shares, which carries no voting rights, as a stock dividend. The stock dividend was issued in a 1:1 ratio, effectively resulting in a two-for-one stock split.
The new class of shares were issued mainly to ensure that Mr. Kevin Plank, Under Armour’s founder and CEO retains control and authority over the company. While these kind of manoeuvres to protect the founders control may attract a strong reaction from shareholders and institutional investors, shareholders of Under Armour were not overly concerned. The company has done phenomenally well in the past under Kevin Plank, delivering 20%+ revenue growth in twenty-three consecutive quarters. In Q4 2016 it grew at 31% YoY. Under Armour is riding on the growing athleisure trend which is likely to stay for a while.
However, the twenty-three quarters of strong growth has driven Under Armour’s valuation sky high. Looking at Under Armour’s PE ratio one might be tempted to think that it’s a high growth tech company and not a textile apparel company. Currently, Under Armour trades at a PE ratio of around 80 while Nike is trading at a PE of 27.
While Under Armour’s rapid growth may have justified its sky-high valuation, the company will find it increasingly difficult to command such valuations going forward. As it happens with most high growth, rich valuation companies, a slight slowdown in Under Armour’s revenue growth will attract the bears in hordes.
And analysts are already questioning the company’s growth potential. Recently, Morgan Stanley Analyst Jay Sole reiterated his $32 price target, much below Under Armour’s current price of $41.7 on growth worries. A DCF valuation indicates 11% downside for Under Armour stock. However, the consensus price target is at $51.6, 20% higher than the current price. But even a slight miss on revenue target can drag the shares down.
Under Armour expects its Q1 2016 revenue to grow in high twenties which is in line with analysts estimates. The company continues to face strong headwinds on the gross margin front. In Q4, the gross margin had contracted by 180 basis points YoY to 48% from 49.9% and it expects margin contraction of 150 BPS in Q1. Q1 is likely to be the company’s weakest quarter on the margin front in FY 2016. On the inventory front, the news is not great either. Under Armour expects inventory growth to remain above sales growth. Inventory accumulation will continue to result in margin contraction for the company.
Under Armour has been growing at a tremendous pace in last five years, with revenue growth exceeding 20% in last twenty-three quarters. And investors have rewarded it with rich valuations, with the stock trading at PE (ttm) of 80 and two year forward PE of 50.3. The question is whether too much growth is priced into Under Armour stock?