- Despite strong earnings in Q1, Under Armour went through a stock shock after the call.
- Morgan Stanley's downgrades this year and a declining women's segment have created a downward drag.
- The only hope for the stock post Q2 earnings lies in not missing any estimates and showing 20%+ top line growth YoY.
At the Q1 earnings call this year, Under Armour (NYSE:UA) came in strong with earnings per share of $0.04, beating analysts’ average estimate of $0.02. Total sales also came in at $1.047 billion for the quarter, going well above analyst estimates of $1.036 billion.
A Rapidly Expanding Topline
This a hyper-growth company that has been expanding at double-digit rates for the last several quarters, and the company is targeting $7.5 billion sales in 2018. Under Armour’s 2015 sales touched $3.96 billion, which means the company needs to grow at a CAGR of over 23% to get to that mark; and if the past five quarters are any indication of the future, they should be able to get to their target much earlier.
CEO Kevin Plank during Q1 Earnings Call:
“We have started off our 20th year in business with impressive results. Our first quarter revenues grew 30%, with the growth coming from every facet of our business.This means our top-line growth exceeded 20% for the 24th consecutive quarter, that's six straight years above 20%.”
Despite strong numbers posted in Q1, there is some concern around UA’s domestic apparel growth - especially in the women’s segment. Since the second half of 2015, numbers from that segment have been showing negative growth.
Any weakness in the apparel segment or in the women's division in Q2, however, can be easily offset by the company's growing footwear and International business. Under Armour expects revenue growth for the second quarter to come in the high-20’s, which is within reasonable bounds based on historical growth data, but I wouldn't be surprised if they go well above the target and beat the current consensus estimate of 0.01 EPS supported by growth in those two segments. Let’s not forget the fact that they started their preparations for the 2016 Rio Olympic Games as early as the first quarter, so they should be able to show some gains from that as well.
Wearable tech is another major upside for UA, with two key acquisitions costing them a cool $625 million over the past two years. UA intends to be the leader in wearable technology, but not just with health trackers. Their long-term vision is biometric apparel, and they’ve already taken baby steps towards that with the UA HealthBox that features a band, a scale and a heart rate monitoring chest strap.
2Q Earnings Are Crucial For Stock Price Recovery
The second quarter results are critical to UA’s stock price, which has been struggling to regain traction since their Q1 earnings were out. Morgan Stanley downgraded the stock to underweight from equal weight in January this year, and downgraded it further to sell, slashing the price target to $32 from $34 in April - right before their Q1 earnings call.
Under Armour stock has been under pressure for some time now and the stock has pretty much been moving sideways since January this year, thanks to the Morgan Stanley downgrades. UA is also losing momentum in the women's segment, and some high profile exits have caused concern as well.
The real issue at hand here is that the stock is still trading at nearly 78 times earnings, and any small disappointment from the earnings call could easily send a shock wave, exerting enormous downward pressure on the stock. UA is still a great company, and if you are ready for the long term, that will be the time to add to your position.
Watch out for the full post-earnings analysis shortly after the call on July 26.