Nice beat from UAA. Not a nice quarter, but nice beat. Big difference. Printed $0.09ps vs Street at $0.04 – which is where the co guided with 90% of the quarter in the bag at the Dec 12th analyst meeting. Gross margin and inventory look really good to me…which is perhaps the only positive. My big sticking point with this name is that its barely growing. Total revenue was up only 1.8%. Core North America was -5.6%, and Footwear – supposedly the biggest growth driver at UA – was -4.5%. Unacceptable. Nike is 8x larger than UAA – and its putting up a growth rate 5x UAA. Something’s just not right with that picture. UA's best hope here is that Nike no longer considers UA to be a competitive threat. I’m in the camp that the decelerating growth profile is structural, as it needs a major reorganization (yes, another one) and round of people-investment to build the R&D, Sourcing, Marketing triangulation infrastructure needed (that you see at footwear companies Nike, Adidas, Puma, Skechers, etc…) to scale up a profitable footwear business. Until then, UAA is a struggling apparel company and we’re going to have to keep battling with questions like why it failed to outcomp Kohl’s this quarter. At 24x EBITDA, that matters. From where I sit, there is zero fundamental reason to own this name until I get confidence that it can double the size of its Footwear business over a TAIL duration.
That said, there are two sides to every story…after all, someone is buying it here today, and the short interest is at a 3-year low for a reason. While I don’t buy into the exercise of ‘slapping a normalized margin’ on UAA (such a thing does not exist in #retail5.0), the reality is that the financial profile of this business is sitting close to trough. Is +1.8% the real ongoing top line growth rate for UAA? No. Its 3-4% top line goal for 2019 is definitely doable, though still represents share loss in the global athletic category. On top of that the company just sandbagged 1Q – setting up for another beat in 13 weeks. Could we see UAA putting up mid-single digit growth in another 2-3 quarters as it earns back shelf space at US wholesale while its driving SG&A lower in the wake of the latest round of cost cuts? Yes. I call that #growthaccelerating and margins headed higher (even though rev upside should be reinvested in the business). In other words you could definitely construct a positive rate of change call in the back half of 2019 – which probably helps the multiple, or at a minimum keeps hope alive that the current earnings power is materially understated.
Given the severe mismatch between reported growth, guidance, financial returns, valuation (61x pe and 24.5x EBITDA), and bullish sentiment, it’s clear to me that the market is already expecting a hockey stick in margin trajectory over both a TREND and a TAIL duration. This company is likely to put up something close to $0.40 in 2019, and is on track to earnings $1.00 in another five years. Let’s be clear…a LOT can happen in five years. Competitors are getting more aggressive, more sophisticated, and the global economy is slowing. A recession over that time frame resets the bar for UA lower -- again. The punchline is that I’m not going to pay 20x an earnings number that might or might not happen in another 5-years for a company that is structurally set up to cede share in an increasingly competitive space with shrinking wholesale doors. More than ever, this company smells to me like Reebok did before it got acquired by Adidas (note, that’s not a compliment), though unlike Reebok, UAA has virtually zero take-out optionality.
With the stock in the mid-teens, I’d get interested in going long. The factors and RoC matter to me at that point. With the stock approaching the mid-$20s, I think growth matters again instead of the ‘fictitious margin structure’ call. That’s when I get heavier short side.
