Why Under Armour Is The First Of Many To Be Hit By Sports Authority’s Demise

This one’s going to sting for a while.

While the death of onetime leading sporting goods retailer Sports Authority was expected to have an impact on its major vendors, some may have underestimated the toll.

Under Armour Inc. created quite the stir Tuesday when it downward-adjusted its full-year outlook, citing pressures from Sports Authority’s bankruptcy and subsequent liquidation. The Baltimore-based brand said it expects 2016 net revenues of about $4.93 billion and operating income of $440 million to $445 million, compared to previously upward adjusted guidance predicting revenues of $5 billion and operating income in the range of $503 million to $507 million.

The brand also told investors that in addition to taking a $23 million impairment hit in Q2, it would only bring in about $43 million of its originally planned $163 million in revenues from Sports Authority in 2016.

Since then, the firm’s stock has been seeing red, while Sports Authority’s top creditor, Nike Inc., has also seen its shares trade down on the news.

UBS Investment Bank analysts Michael Binetti pointed out that Under Armour’s $23 million impairment charge is the exact amount that Sports Authority said it owed to the brand in a bankruptcy court filing in March. Meanwhile, Nike, according to Sports Authority’s court documents, was owed the largest sum of all athletic brands, at $48 million. (In other words, if Nike were to also recognize an impairment charge equal to its unsecured claims, that amount would be to the tune of $48 million.)

We estimate Nike’s annual Sports Authority revenues could be $300 million,” Binetti added. “It’s hard to know whether Nike assumed Sports Authority would fully liquidate (Under Amour obviously did not).”

If, like Under Armour, Nike’s actual Sports Authority revenues were also 75 percent below plan, the $225 million revenue loss would be less than 1 percent of annual revenues for Nike, Binetti noted. (Compared to 2.5 percent of annual revenues for Under Armour.)

Under Armour had initially maintained an optimistic posturing on the Sports Authority bankruptcy — before the retailer announced that it would have to liquidate — stating that it did not believe the exposure to its receivables from Sports Authority was materially impacted.

Now that the Sports Authority is completely shuttering, the brand could be the first of several to see its revenues slip as a result of impairments and lost revenues.

According to bankruptcy court documents, other athletic firms with unsecured claims from Sports Authority include Asics America Corp., owed $23.3 million; Adidas’ golf business, TaylorMade Adidas Golf, owed $2.5 million; Brooks Sports Inc., owed $2 million; and New Balance, owed $1.6 million.

Implus Footwear LLC, a manufacturer of footwear and recreational accessories for brands such as New Balance and Yaktrak, is also owed $9.4 million. Agron Inc., a licensed dealer for Adidas products such as socks, hats, bags and other sporting goods accessories, is due $9.2 million.

Sterne Agee CRT analyst Sam Poser, Canaccord Genuity Inc. analyst Camilo Lyon and Citi Research analyst Kate McShane all maintained buy ratings on Under Armour’s stock despite what they generally described as short-term pressures.

We believe Under Armour’s 2018 revenue targets remain firmly in place, and expect it will find alternative channels to replace the lost sales by next year,” Lyon said. “As such, we view this as a transition period that Under Armour will overcome, and our positive long-term outlook remains intact.”

Poser also stayed upbeat on Under Armour despite the Sports Authority “hiccup,” pointing to several long-term growth prospects.

The impact of Stephen Curry in the NBA Finals, the recent win on the PGA tour by Jordan Spieth, the upcoming Summer Olympics, which all of North America can watch live on TV for the first time since 1996, and continued accelerated international growth keep Under Armour as a top pick for long-term growth investors,” Poser said.

Susquehanna Financial LLLP analyst Christopher Svezia and Binetti maintained neutral ratings on Under Armour’s stock.

Lyon noted that he expects Nike and VF Corp. to also reduce their outlook due to Sports Authority’s liquidation, “however, the impact should be less given the greater diversification in their lines of business.”

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