Why Under Armour’s Third Quarter Could Deliver Major Sales Growth

Market watchers have high expectations for Under Armour ahead of the brand’s third-quarter earnings report, due before the market open Tuesday.

Consensus estimates peg the Baltimore-based brand’s revenues at $1.46 billion, a 21 percent year-over-year gain, while earnings per diluted share are expected to edge up 2 cents year-over-year, to 25 cents per share.

Based on our store checks during Q3, UA inventories at wholesale looked very clean,” Citi Research analyst Kate McShane wrote Friday. “Feedback on UA women’s business has improved, with UA women’s likely outperforming flattish athletic apparel trends this quarter on a stronger assortment.”

Canaccord Genuity Inc. analyst Camilo Lyon said he believes that after UA’s first-half challenges — including winter inventory hangover, management departures and Sports Authority’s bankruptcy —  Q3 will “begin to show a normalization of demand trends.”

We are positive on Under Armour into its Q3 report,” Lyon wrote Friday, noting that he is projecting EPS in line with consensus but expects revenues roughly 50 basis points ahead of consensus, at 21.3 percent growth. “[But] we [also] see the potential for modest upside to sales (up 1 percent)/EPS (up 1 cent) as [Dick’s Sporting Goods] hurries to open former [Sports Authority] store locations pre-holiday.”

By most accounts, footwear is expected to continue to lead the brand’s sales growth in Q3 and beyond, while international as well as the new Kohl’s partnership remain highly anticipated long-term opportunities.

As international scales from 13 percent of sales currently to near targets of 20 percent by 2018, international operating margin of 1.6 percent in FY16 should expand over time,” Cowen & Co. analyst John Kernan wrote on Monday. “UA’s footwear is increasing premiumization, especially in basketball and running, with the latter representing a significant white-space opportunity through an improving product offering.”

In his analysis of the Kohl’s partnership, Kernan said he sees estimated annual wholesale volume ranging from $400 million to $700 million. Lyon estimates that the Kohl’s entry (in early 2017) represents a $300 million sales opportunity.

Overall, we are expecting a solid Q3 with a favorable Q4 outlook,” Lyon wrote. “We believe a strong finish to 2016 will bode well for solid 2H17 orders, thus boosting total revenue growth in excess of 25 percent next year.”

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