I struggle with my UAA short positioning more than I do with any other name. Not just because I’m wrong today – there were plenty of puts and takes to the quarter and the absolute earnings algorithm was horrible. This was a beat off well-set anemic expectations. But in the low $20s, this stock is in purgatory, and it needs to find a new home. The reality is that it should either be a $12 stock, or a $35 stock. I think that this company operationally looks a lot more like Reebok ($12 stock) than a mini-Nike ($35). But I gotta say that there were a few things I heard on the call that made me step back and ask myself if staying short in the low $20s is simply a lousy idea. Here’s the Bull Case and Bear Case as I see it.
- Less of Kevin: The most notable point for me on the call was how little Kevin Plank actually talked. His opening remarks were brief (his usual cheerleading rooting), but then he turned over the rest of the call to his team. Patrick Frisk (President) and David Bergman (CFO) dominated the Q&A. Could he REALLY be backing away on the margin? I know that’s been part of the bullish narrative, but either I refused to believe it or simply needed to see it. This call was the first bit of evidence for me that it’s true.
- Footwear: Put up a 7.6% growth rate. Granted, given how small this business is, it should be growing footwear by 30% -- not something below the rate of Nike. But the fact that it reaccelerated is a positive for me. If you can’t make a bull case about this becoming a footwear company, then it’s simply not a growth company worth a 60x P/E (or even a 30x P/E).
- Inventory: Down 24% after a 12% decline in 4Q. The company is cleaning up its balance sheet, and setting up for gross margin improvement as the year progresses.
- SG&A Discipline: I have a 17-year model on UAA, and this is the first quarter where all three components of SG&A (Core, Marketing, Other) were down in a single quarter. This is largely due to the restructuring program, but at least financially, it’s working.
- No-Growth Growth Company: I know that the company is in the ‘Protect this House’ part of its turnaround – i.e. simply stabilize the business. But the fact that it only put up 1.6% top line growth is simply a yawn. To own this stock in the $20s you need to believe in real growth. It ain’t showing up, at least not yet.
- Uninspiring Business Mix: 4% of sales growth came from the off price channel, with its own Direct to Consumer -6% vs last year – at a time when it had 11% more stores than a year ago. If I was locked in a dark room and only had one number to gauge the true demand for a consumer brand, it’d be its DTC volume, and UAA’s was a disappointment. Lowest percent of revs in 2-years. It needs a consumer ‘pull-model’ and it’s nowhere in sight.
- 2Q Footwear Slowdown: While 1Q offered a glimpse of hope as to how the company is managing its footwear business, we’re likely to see a significant slowdown in 2Q as it goes against the toughest comp in 10 quarters.
- Regional Mix Heavily Dependant on China. North America was -2.8%, and EMEA (should still be an emerging market for UAA) was only +8.6% in constant currency – a sharp deceleration from the 36% we saw in 4Q. The entirety of growth in this model is being driven by AsiaPac – which slowed 1,000bp sequentially to 25% (in line with peers).
- Will SG&A Leverage Stick?: Competitors are amping up the cost of growth in this business. UAA severed unprofitable marketing plans and flowed that through the P&L. But never in my career have I seen a company cut SG&A dollars in the athletic business and refrain from subsequently stepping up and deploying them on other expensive assets. I don’t think UAA will be any different – which needs to be factored into the longer term ‘normalized margin’ bullish narrative.
- I Was Disappointed by Gross Margin. Up 45bps despite a 130bp easy compare from last year’s heavy reliance on low-margin off-price channels, a favorable inventory position heading into the quarter, and the $30mm use of reserves. ‘Negative channel mix’ affected gm by 70bps, slightly better than the 80bps headwind in 4Q – but it takes time to get the consumer off of the off-price/discount drug. Again, on the ‘pull model’ point, UAA needs to be making product that people actually want to buy at full price, not just bc they’re on a sale rack.
The Set Up From Here
My biggest concern short side is that in 2H, we’ll likely see accelerating growth in an otherwise decelerating retail environment – which gives multiple support. Let’s be clear tho…we’re only talking 200-300bps growth acceleration…and a mid-single (4-5%) top line growth number for Under Armour is pathetic. It should be materially out-growing competitors that are 5-7x larger than UAA. Heck – LULU is crushing it on every metric – growing nearly 2,000bp better than UAA, and is trading at a 40% discount to UAA. Would I rather own Nike at 28x earnings than UAA at 60x? Yep. But I fully respect that the company has issued slam-dunkable guidance for this year. It might only beat by a few pennies each quarter, but there likely won’t be a headline miss. If it’s beating in 6-months – even on a small scale – at a time when DTC turns positive, then this could easily push $30 – and I don’t want to be short that. To be clear, if I thought that would happen I’d cover my short position right now. Again, I think it lacks the demand-drivers for people to continue to consider this a growth stock as it exits this stage of its turnaround, and think that the next ‘growth’ stage will disappoint. But that’s where my research is focused right now. Gotta answer that question. Stay tuned.