I don’t see how UA hits 2H targets, but that’s hardly an out-of-consensus view. We’ve been warming up to UA…and a bad EPS event might be the opportunity we were waiting for.
As Brian noted in his earlier post (Capitalists Starting to Emerge), we’re a lot less concerned with earnings revisions as we are with which companies will still exist over the next 2 years. Who goes away? Who doubles in size? UA is the latter. I’ve been getting more jazzed about this name (check out our 9/28 post -- I’m Warming to the Armour), and think that any weakness around tomorrow’s earnings event is a great chance to get involved.
We’re 6% below the Street on the quarter, and 12% below for the upcoming 12 months. This is almost entirely due to weak gross margins. It’s been our view for a while that with UA growing into lower margin businesses with dominant competition and high cost of growth, Gross Margins should come down. Well, we’re finally there.
I cannot look through weak GMs by any means, but what I like is that UA has consistently driven its SG&A ratio despite over-delivering on the top line. In other words, it has been adding the assets to fuel the top line, and also has cost levers to pull in case revs fail to deliver. We go over this more in our 9/18 post (UA: Warming Up To The Armour).
It’s tough for me to find a company where I can identify the top line doubling over 4 years. I think that even in this economy, UA will see it. 6.5x EBITDA is not cheap relative to some other names in retail (trading as low as 2.5x-3.0x), but I’ll pay a premium for growth in this environment – especially given that some peers will cease to exist.