Analysts ‘Encouraged’ Ahead Of Under Armour’s Q2

While liquidation disruption stemming from Sports Authority’s demise and turbulence in its shares are among the challenges Under Armour Inc. has had to face in recent months, analysts say they remain optimistic about the brand’s future.

Citi Research analyst Kate McShane and Canaccord Genuity Inc. analyst Camilo Lyon agree that Under Armour’s pre-announcement of its downward adjusted outlook, based on Sport’s Authority’s closure, has de-risked the stock ahead of Tuesday’s Q2 earnings release.

At the same time, long-term growth potential and the achievability of the company’s three-year plan, released in 2015, also keep McShane upbeat.

We remain encouraged that despite liquidation disruption, management’s most recent full year outlook still assumes top-line growth in the mid-20 percent range, roughly in-line with long-term guidance (of 25 percent [compound annual growth rate] through FY18),” McShane wrote on July 20. “Under Armour continues to invest in long-term opportunities, including footwear (running, golf, basketball, women’s), Connected Fitness, Project Glory (a new local-to-local manufacturing initiative), SAP, and category expansion into sportswear.

While Under Armour was also recently dubbed the most shorted stock on the S&P 500, Lyon said he believes improving Q2 inventory will “be the key positive metric” for the stock following Tuesday’s release.

We believe Under Armour cleared much of its remaining excess inventory in Q2 with minimal margin impact,” Lyon wrote on July 21. “In addition, investments in supply chain/inventory have continued to support greater on time delivery rates to wholesale customers, also resulting in better margins … we believe inventory will be the positive catalyst for the stock.

Consensus estimates peg the Baltimore-based footwear-and-apparel company’s Q2 earnings per share at a penny and its revenue growth at more than 27 percent, to $1 billion.

McShane kept her EPS bet in line with consensus but expects revenues to increase 25.4 percent year over year, to $983 million, driven by footwear gains of 75 percent, 21 percent apparel growth, and an increase of 25 percent in accessories’ sales.

Lyon is also forecasting EPS of a penny and expects sales growth of 26 percent.

With the two most challenging quarters Under Armour has faced in years behind it, we believe Q2 will mark a turn in sentiment (28 percent short interest and nine days to cover) as we expect the company to deliver solid 26 percent sales growth while keeping margins in line and most importantly, significantly working down its inventory position,” Lyon wrote.

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