UA: Numbers Are Not What They Seem

Takeaway: Lower rev guidance plus lower SG&A on top of leadership chg does not fill us with confidence that UA will be smoking top line net yr.

Overall, a good print from UA with top line (+25%) and EBIT (+47.5%) both accelerating and beating expectations and EPS a penny ahead of consensus. The top line came in robust at face value – there’s no denying that. But after adjusting for retail gross-up it was slightly less impressive. That said, Gross Margins were weak – coming in -132bp vs last year, compared to guidance that they could be down at a rate nearing -100bp.

 

As an offset, SG&A grew at 13%, the slowest rate since 2Q09.  The reality is that guidance for the upcoming year is a tad light at +20-21% top line, and there was zero mention in the press release of the strategic issues that we think are looming in the footwear organization (evidenced by UA’s FW czar Gene McCarthy departing last week). If the company would have had a mor normalized SG&A rate, it would have missed by about a nickel. Perhaps there’s a great reason for that, which we’ll hear about on the 8:30 call. But given the lack of traction in FW, we’d rather see the company keep SG&A in the business in order to stimulate continued share gains.

 

Lower revenue guidance plus lower SG&A on top of leadership changes does not fill us with confidence that the company will be smoking top line estimates next year – something it will need to support its multiple.

 

Also, a little factoid to keep in mind as it relates to UA’s revenue… Given a $59mm sequential positive pop in direct-to-consumer revenue, we should juxtapose that against the -$69mm decline in aggregate revenue. We won’t penalize the company for going more direct. That’s the wave of the future. But booking retail revenue is optically more attractive than going wholesale. The way we look at it, if you ex out the retail gross up, there was no sequential uptick in revenue. In fact, it was down slightly.

 

One of the biggest positives was the improvement in inventories, which clocked in $5mm below last year despite a $100mm boost in revenue. A clean balance sheet is something UA needs right now. 


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