Conclusion: Not the quarter a 50x multiple needed. We remain confident that this company will double – at least – over 5-years. But will continue to spend heavily to achieve that goal. One thing we’ve got to give UA regardless of margin trajectory – this management team is as focused as any we know. LULU should pay attention. So should Nike, for that matter. The bottom line on UA is that despite the Brand heat, we have zero interest in owning the stock at this stratospheric valuation.
Overall, it was a great quarter for UnderArmour when viewed in isolation. Unfortunately, the market does not view things in isolation – nor do we. Let’s be real about something…when you trade at over 50x earnings and nearly 30x EBITDA with short interest at a 30-month low, and are following a blow-out quarter where you added $1.7bn in Enterprise Value in a single day (to what was a mid-cap stock) there is literally zero room for any blemishes in the quarter. That’s not our rule, but it is the market’s. There were one or two minor blemishes in this print.
People obviously did not love UA’s guidance for the upcoming year. UA beat by $43mm in revenue, but only took up full-year guidance by $40mm. Yes, we realize how punitive of a statement that is for a company that will double in size over the next five years, and is probably sandbagging guidance anyway. UA is no better or worse than other companies at the guidance game. But at this valuation, it matters more than it does for others.
There’s a couple of things related to the company’s revenue strength that really stand out to us.
- Investment: The first is it’s level of investment. While margins were up 132bp this quarter, we should look at it over a longer time period. Over the past 5-years UA added $440mm in 1Q revenue – a huge feat given that it has largely done so in a singular market (the US). But at the same time, it has only added $19mm in incremental 1Q EBIT. That’s an incremental margin of only 4.3%. Nothing to write home about by any stretch. We’re not knocking UA by any means. It’s doing what it should – a) have confidence in strategic plan, b) spend around the highest growth opportunities, and c) grow top line at 2-3x the rate of competitors. We’re still probably a few billion in revenue away from the efficacy of this model being at risk. This is great for growth, but anyone holding out for margin expansion should probably look elsewhere.
- The Plank Factor: The other major factor as it relates to UA’s Brand Heat rests with its fearless leader. In the company’s early years, we were critical of Kevin Plank as he came across as arrogant, unfocused, and seemed to foster a ‘clubby’ environment within the company. While this evolution has taken place over a number of years, there was something about Plank today on the call that seemed exceptionally mature, seasoned, focused, and not only a great Brand ambassador (which he’s always been) but a flat-out solid leader for UnderArmour. The interesting comparison is with Nike, which we’ve followed very closely since the 1990s. We never thought we’d say this, but Kevin Plank appears to be a better leader than Phil Knight was at a similar point as CEO.
HERE’S OUR KEY MODELING ASSUMPTIONS