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Analysts Are Still Skeptical of Under Armour’s Turnaround — Here Are the Hurdles That Remain

Market watchers expressed caution in the year ahead for Under Armour Inc., whose stock was down in midday trading despite better-than-expected first-quarter results and a raised outlook.

For the three months ended March 31, the sportswear giant posted adjusted profits of $75 million, or adjusted earnings of 16 cents per share, versus Wall Street’s predictions of earnings of 4 cents per share. Revenues increased 35% to $1.3 billion, compared with consensus bets of $1.12 billion.

What’s more, Under Armour upgraded its full-year guidance, anticipating revenues to be up by a high-teen percentage rate. (It previously projected a high-single-digit percentage rate increase.) Adjusted earnings per share are also estimated to be in the range of 28 cents to 30 cents — better than the previous forecast of adjusted EPS in the range of 12 cents to 14 cents.

Still, analysts questioned the Baltimore-based brand’s ability to recover from the lasting impacts of the COVID-19 health crisis. According to CFRA Research equity analyst Camilla Yanushevsky, Under Armour’s top- and bottom-line beats were buoyed by fiscal stimulus, which she said “made UAA’s transformation narrative appear more robust than reality.”

In a distribution note, where she lifted the company’s price target from $12 to $16 a share yet kept her “sell” rating, Yanushevsky wrote, “We believe UAA will be unable to meet long-range targets.” She pointed to “four sequential calendar years of declines” in North America, where the brand has “largely missed out on athleisure trend, which we see as most resilient fashion category amid COVID-19.” She also highlighted compound annual growth rate challenges within its direct-to-consumer channel, which improved 54% to $437 million in the quarter but has been “underperforming peers” for the past two years.

Another potential headwind in the second quarter for Under Armour is the divestment of MyFitnessPal, whose $345 million sale to Francisco Partners closed in the fourth quarter. In addition, during a conference call with analysts, CFO David Bergman cited a number of potentially negative impacts for Q2, including “channel mix — with e-commerce being a considerably lower portion of the overall business when compared to last year — and within the wholesale channel, we expect a higher percentage of off-price sales versus last year’s second quarter when off-price was predominantly closed.”

He added, “Finally, we anticipate increased freight expense from a supply chain perspective relative to the prior year as we work through ongoing logistics and transportation challenges. These negative factors are expected to be partially offset by an improvement in pricing due to lower planned promotional and discounting activities, along with some tailwinds from changes in foreign currency.”

Separately, other analysts kept their “neutral” ratings for Under Armour. According to J.P. Morgan analyst Matthew Boss, who raised his price target to $25 from the prior $20, UAA “operates in a healthy athletic, health and wellness market but continues to underperform athletic peers.” UBS analyst Jay Sole reported a price target of $26 — with eyes on the brand’s resilience and prospects in 2021.

“The pivotal question around UAA is if the company can engineer a turnaround,” Sole said. “The company’s high-quality first-quarter 2021 EPS beat and guidance raise suggests the answer is increasingly yes. However, it is unclear how much fiscal stimulus or other one-off items contributed to first-quarter results. This makes it hard to evaluate the strength of UAA’s turnaround in our view.”

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