Under Armour’s turnaround gains traction on rising EPS forecasts

Image of the Under Armor storefront

Key points

  • Under Armor increased gross margins 100 basis points to 45.2% and reduced inventory 9.1% to $1 billion in fiscal third quarter 2024, raising its EPS forecast.
  • Under Armor has developed a new high-performance stretch fabric, NEOLAST, a sustainable alternative to spandex, to launch in 2024.
  • Under Armor stock trades at just 9 times earnings compared to Nike at 30 times and Lululemon at 59 times.
  • 5 stocks we like best about Lululemon Athletica

Sports clothing and footwear company Under Armor Inc. (NYSE: UAA) gave shareholders a breath of optimism with the release of fiscal third-quarter 2024 earnings. The company is gaining traction with its turnaround plan thanks to margin expansion and growth in its direct-to-consumer business ( DTC). The consumer discretionary company has shifted its focus to its core strengths in athletic apparel and footwear, helping boost profits even as revenues are still down from year-ago levels.

With Under Armor shares trading at just 9 times earnings, they are selling at a discount to rivals Nike Inc. NYSE: DI at 30x e Lululemon Athletic Inc. NASDAQ: LULU shares at 59x earnings. Value investors should take a closer look.

Reduce inventory to increase margins

Under Armour’s biggest challenge going into 2022 has been managing rising inventory, resulting in shrinking margins.

On a more positive note, Under Armor increased gross margins by 100 basis points to 45.2%, thanks to proactive inventory management and declining freight charges. A higher percentage of sales to off-price channels and higher promotions in the DTC business helped the company reduce inventory levels by 9% year-over-year (YoY) to $1.1 billion, a notable improvement . Compared to the fiscal fourth quarter of 2023, gross margins fell 310 basis points to 43.4%, while inventories rose 44% to $1.2 billion.

Normalization still persists

The post-COVID opening surge temporarily boosted metrics, but the after-effects of normalization continue as year-over-year revenues continued to decline 6.1% year-over-year.

Nike has also just begun to turn around revenue growth, growing just 0.8% year-over-year in the latest quarter. Lululemon is firmly in growth mode, with revenue up 18.5% year-over-year in the latest quarter.

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On the right track

On Feb. 8, Under Armor reported fiscal third-quarter 2024 earnings per share of 19 cents, beating consensus analysts’ estimates of 11 cents by 8 cents. Revenue continued to decline 6.1% year-over-year to $1.49 billion, below analysts’ consensus estimates of $1.5 billion. Wholesale revenue fell 13% to $712 million, while DTC revenue increased 4% to $741 million. UA Rewards loyalty program enrollment has grown to three million members.

Driving on the rise

Under Armor raised its full-year fiscal 2024 guidance. EPS was raised between 50 cents and 52 cents, from 47 cents to 51 cents, versus analysts’ consensus estimates of 49. Revenue is expected to decline 3% to 4% to a range of $5.67 billion to $5.73 billion versus the $5.74 billion analyst estimate.

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More work to do in North America

Under Armour’s recently appointed CEO, Stephanie Linnartz, admitted that turning around sales growth in its largest market, the United States, has much more work to do. Its North American business fell 12% in the quarter. She argues that the U.S. turnaround will be a multi-year journey back to growth.

Improve executive leadership

He spent his first year as the new CEO prioritizing strengthening the company’s leadership by adding new, experienced officials to lead the engineering, product, consumer, supply chain and communications teams. The company has optimized itself to become more agile and enable faster decision making by implementing small batch execution cycles. The company will launch NEOLAST, a new high-performance stretch fabric as a high-performance alternative to spandex.

Nearly two-thirds of its leadership team were recently appointed. Linnartz commented: “Given our product creation cycle, it will take some time before this newly led team begins to introduce greater critical mass into the equation. Yet we won’t take a break until then. We have a lot of news to be about excited as we head into Spring Summer 2024, especially in apparel.”

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Under Armor chart on MarketBeat

Daily ascending triangle pattern

The daily candlestick chart on the UAA illustrates an ascending triangle pattern. The upward trend began at a low of $7.19 on January 17. The flat-top upper trendline formed at $8.19.

The ascending trendline triggered a breakout of the market structure low (MSL) at $7.55, with higher lows on pullbacks as the UAA approached the peak point. The daily relative strength index (RSI) has risen through the 50 band. Pullback support levels are at $7.55, $7.19, $6.94, and $6.56.

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