I get the headline beat on a highly shorted stock on a good retail tape day…but this +25% reaction is what we should see if the business just inflected and set itself up for a 2-year ramp in growth. That’s not the case. The market is looking through the dramatically lower 4Q guide and flat-out challenging set up for 2019. If you didn’t know why it renegotiated its debt covenants, thanks to the 4Q guide -- now you do.
I think the call on UAA here is quite simple – and that is focused on whether it can grow from here, or not. The company has just gone through two years of pain as distribution, product and internal capacity (systems and people) hit a wall. We had more accounting changes than I could shake a stick at, SKU reduction, endorsement renegotiations, store closures, and getting inventory back to a point where the company can finally take control of its Gross Margin. That’s all great and is now in the model – and after all that the company still is on track to earn a whopping $0.20 per share this year.
But the question to ask now, quite simply, is “Can Under Armour Grow?”. Unfortunately, the answer is ‘No’ and it is locked in an earnings annuity of $0.30-$0.50ps at best for the next three years. When the company hosts its analyst day on Dec 12th, it better bag the whole ‘operational excellence’ schtick, and sell to the Street how it can outgrow Nike by 3x – and not the other way around. The only thing it’s grown faster than Nike is its reserves for product returns (return ratio is 3x Nike today). Without a believable 10%+ growth plan, its 50x+ pe and 23x EBITDA multiples are massively at risk. I wouldn’t touch this stock long side in the $20s. You gotta go way out on the risk curve with modeling assumptions to justify this price – irresponsibly so.
The way I see it, the growth algorithm here is 4-6% top line on a go forward basis – about 400bp of which is driven by International Apparel. In other words, we’re looking at a brand that can grow at the rate of the space globally. There’s no path here to actually gain share of wallet anymore.
- US Apparel (48% of sales): Its most mature business – wholesale doors are closing on the margin. Only real wholesale opportunity is getting space back at DKS next year – though that’s not a slam dunk so long as it sells similar product in KSS. We’ve got 40% SKU reduction, which is a positive for margins, but UA has to put out MORE product at different price points to tier by channel. SKU reduction will only take it so far, and won’t result in actual growth – just less clearance.
- Global Footwear (21% of sales): We heard about all the company’s winning product launches like the Hovr, the Rock and the Curry – and yet footwear sales were flat in the quarter. If those franchises were winners, then the balance of the portfolio lost. This business should be growing 25%-30% at a minimum, yet I think that UAA has the internal process to simply maintain its minority share in what I think is the most important driver of UAA’s NPV. The reason why this business is losing share is that it lacks the sophisticated PLM structure we see at real footwear brands like Nike, Adidas, Puma, Asics, Skechers, etc… Until we see that investment in infrastructure, UAA footwear is in ‘growth purgatory.’
- International (26%): This has been UA’s biggest success story. My problem here is that while we’re seeing respectable growth overseas, UAA is not dramatically outperforming Nike, Adidas or Puma. This is still an early cycle brand in most markets, and growth should be parabolic. Up 15% in the quarter, its lowest 2-year stack since 4Q13. 4Q guidance assumes 15pt acceleration in growth to 30%. That’s an impressive number—though I think the more bankable number here is in-line with the 3Q mid teens growth rate on a go forward basis. Either Int’l is entirely apparel driven, or US footwear is down a lot more than we all think.
- DTC (~35%): It was flat this quarter. Just added it’s 1,000th store. I almost fell out of my chair when I heard that number. DTC is up internationally, which implies down DTC in the US. Not good. Arguably overstored already as it’s been closing bad locations -- and already has what I think is an efficient and sophisticated e-comm platform (~15% of sales) and it STILL can’t grow versus last year.
