This UAA print not enough for the margin bulls to latch on to. Revenue was surprisingly strong – up 6% (though decelerating 160bp on a 2-yr). But margins were only up 70bp vs last year. This throws a wrench into the “let’s slap a ‘normalized’ Reebok-ish margin on this sales base and get to $1.00 in EPS power’. THAT was the consensus HF call over the past 3-months. Sorry, but this company cannot grow without footwear, and the footwear business is structurally broken – needing meaningful cost investment. It was up 2% this quarter and has less than a percent of the global footwear market – sad statement. Margins can’t go up until they go down – again. GM was down 45bp which INCLUDES 70bp of FX tailwind. There was a 130bp hit due to clearance activity, but not enough bc inventory was still up 19% even after adjusting for the likely impact of the markdown allowance accounting change. Hardly GM bullish in 2Q.
Kevin needs to go. Actually the only thing that scares me here is that he works out a deal not unlike when Advent stepped in and saved LULU. There’s your 20% upside day. But if the company continues to disappoint on margins with increasing volatility around lower quality top line growth, the company and the stock simply got no game. I still think that this name has the greatest potential for an outsized revenue miss out of any real business (ie a survivor) in Retail.
Here’s the link to our deck outlining the full call on what UAA should do in order to be one of the biggest stocks of 2019/20 vs what it likely will do to hang onto margin at the expense of growth. We’ll likely see the latter. As this stock pushes closer to $20 I take it higher and higher on my Best Idea Short list. LINK
Here's the model showing what Kevin Should do vs what he probably will do. Should = near term bearish, and lt super bullish. Could/will = great short in high teens/$20s with little hope of meaningful recovery.
