Is it me, or did UAA management just throw out the most ridiculous ‘slam-dunkable’ guidance in its history? Given how well the stock has been working, I’d begun to get less bulled-up on the name. But that all changed on this earnings print. The company guided to $130mm-$150mm in EBIT for the year – but when you look at the rate of revenue recovery, higher GM due to better quality of sale (less off-price, and following Nike’s playbook of cutting out marginal retail doors), and SG&A leverage due to cost cuts during the pandemic, we literally come out 2x above what management guided. Seriously, it looks like the company reverse-engineered line item guidance so the Street would simply stay-put at its current $130mm EBIT number for FY21. But we’re coming out at $285mm…to be clear, the Street has EBIT forecasts of $256mm in 2023 – and UAA is likely to beat that handily this year alone – 2-years early. That translates to a 5.6% operating margin this year, the best since the brand went South in 2016. Without being aggressive at all in our forecasts, we’ve got UAA breaking the $400mm in EBIT level by CY23 – which is 56% ahead of consensus.
This creates some discord as it relates to the stock call because from a valuation perspective, even on our estimate 3-years out, UAA is not cheap – trading at about 35x CY23. If I’m going to pay 35x, I’d rather own Nike, as the brand remains white hot and has a far more defendable investment and asset base in the digital transformation that the business is currently going through (UAA’s digital sales were up only a ‘meh’ 25% rate this past quarter). But from an earnings revision standpoint, this company is about to crush it all year, which sets up a nice catalyst calendar. While UAA isn’t the hated stock that it once was (short interest is down to 8% of the float from 38% prior peak), it’s likely going to be beating estimates by 100% for the next two quarters – or until the consensus realizes that management is completely sandbagging. This could easily be a $30 stock before the earnings momentum eases.
Not our favorite idea out there, as the brand still has a lot of progress to make before it has a strong pull-model with the consumer. But we definitely like the earnings trajectory here. UAA sits near the top of our Long Bias list.
-- McGough
