Let's do another retrospective, the erstwhile market darling Under Armour.
A year ago we asked When will Under Armour over "margin"? and concluded:
Do you buy into the topline story? Will it be like an Amazon or Netflix, where the cashflow eventually comes through? I don't see any reason to think otherwise, but in the meantime... will the stock see any love. I fear not. At least not until the hot money's truly capitulated. Mean, eh?
What's changed?
And it looks like we were right to avoid it. Here's what's happened to the key metrics:
| $UAA | a year ago | today | change |
|---|---|---|---|
| Price | $38 | $16 | -58% |
| Target price | $49 | $19 | -61% |
| Sales forecast 2017 | $6.2bn | $5.2bn | -16% |
| EPS forecast 2017 | $0.78 | $0.37 | -53% |
| PE ratio | 66x | 45x | -31% |
So, the new questions have to be:
- Is the hot money finally gone?
- Are margins on the mend?
Aside: Key Stats
| Ticker | UAA |
|---|---|
| Sector | Other Apparel & Accessories |
| Latest price | $16.42 |
| Value | $6,940M |
| Daily vol | $70M |
| Date | 28 September 2017 |
| Links | Financials, underarmour.com |
1. Who are they?
You probably own or have seen their brands on your friends. It's sports clothes / apparel, footwear and accessories for men, women and youth. And they do more than just sports goods, they even have a digital offering, inc. MyFitnessPal. It's been a phenomenal sales story. And Wall Street still likes the outlook:
| Metric | 2012A | 2013A | 2014A | 2015A | 2016A | 2017E | 2018E |
|---|---|---|---|---|---|---|---|
| Revenue | $1.8bn | $2.3bn | $3.1bn | $4.0bn | $4.8bn | $5.2bn | $5.8bn |
| EPS | $0.30 | $0.38 | $0.47 | $0.53 | $0.58 | $0.38 | $0.45 |
But there is the little issue of margins, The gross margin and operating margin have been under pressure, the last 3 years and in the first half of 2017.
| Metric | 2014A | 2015A | 2016A |
|---|---|---|---|
| Gross Margin | 49% | 48% | 46% |
| Operating Margin | 11.1% | 9.7% | 8.0% |
Then, on the 2Q call with investors they said they needed to launch a restructuring program, and all the growth came from lower margin footwear and international units. As a result they pulled in guidance. And the impact wasn't nice. Downgrades!
A few asides
- Please don't lose sight of the silly shareholder structure with A, B and C shares. Just like Google. But this ain't Google.
- They have some debt, which is less than 2x profits, so not a concern today, unless the margins keep getting hit.
- There's no dividend. Which seems unreasonable. As they could pay one and still invest in the future.
2. Are there better brands?
Quite frankly, yes? At least on the margin and returns front.
| Companies | Latest Sales | Operating Profit | Return on Equity |
|---|---|---|---|
| Under Armour Inc | $4,982M | 11% | 11% |
| Nike Inc | $34,350M | 16% | 34% |
| VF Corp | $11,750M | 15% | 26% |
| Coach Inc | $4,488M | 22% | 21% |
| Ralph Lauren Corp | $6,448M | 13% | -1% |
| Lululemon Athletica inc. | $2,436M | 21% | 22% |
| Michael Kors Holdings Ltd | $4,458M | 24% | 32% |
Of course, they may be hurt by their focus on top line growth. So it could be they are investing margin today, for future gain. Like an Amazon. Except this ain't Amazon.
And despite the plummeting stock price, the valuation still hasn't hit a bargain price, let alone the market price.
| Peers | Valuation | Forecast PE | Long-term Growth | Dividend Yield | FCF Yield |
|---|---|---|---|---|---|
| UAA | $6,940M | 44x | 10% | 0% | 5% |
| NKE | $86,452M | 22x | 8% | 1% | 7% |
| VFC | $24,818M | 21x | 8% | 3% | 8% |
| COH | $11,371M | 17x | 12% | 3% | 10% |
| RL | $7,249M | 17x | 2% | 2% | 6% |
| LULU.O | $8,141M | 25x | 12% | 0% | 5% |
| KORS.K | $7,361M | 13x | -2% | 0% | 9% |
3. Wall Street threw in the towel 6 months ago!
Wall Streey haven't showered themselves in glory, only cutting it to a Hold in February when the stock had plummet to $20. That's from a high of $54 in late 2015.
And they've not got their confidence back, still saying Hold even though their target price of $19 is a tempting 20% above today's price.
With downgrade after downgrade, and no sign that margins are on the way back up, I don't blame them!
4. If not now, when?
I don't like the idea of kicking someone when they are down. So even if I'm staying clear of this falling knife, I'd like to hope there are signs of a turn around!
Firstly, a mea culpa by the founder. He's brought in an experienced COO, Patrik Frisk. Here's a nice profile of him.
Second, the founder makes a compelling argument about their ability to adapt and grow...
from being a North American business to being a global business, an apparel business to being a footwear business, a men’s business to being a women’s business, a performance business to being a lifestyle business.
It's true, they'd adapted well, and with the injection of new talent, they could power on.
Third, the market no longer expects them to grow the top line by $1bn+ a year. So expectations are nearing reality.
So, if there are any signs that the COO can re-energize the business, then I'll be tempted in.
But back to my two questions, 1. no, the hot money hasn't fully capitulated yet, and 2. the margins still haven't turned north. Sorry.
View the archive of Stock a Day posts at r/stockaday.
Disclosure:
I have no position in the stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.
Author: /u/shane_stockflare Shane Leonard, CFA
Submitted September 28, 2017 at 09:23AM by shane_stockflare http://ift.tt/2wXiydP
