Apparently with the stock down 3% on this print, it was the worst kept secret this earning season that UAA was going to smoke the quarter. But smoke it did. The company put up $0.16 per share vs the Street at $0.04 (we were at a Street-high $0.12). Revenue looked solid across the board – up 35% vs last year and +4.4% above 1Q19. But what was most impressive was the Gross Margin line, which was up 367bps to 50%. To put that in perspective, I have to go back to 4Q13 in my model to get to another quarter where Gross Margin was 50% or better – and that’s when this brand had all the pricing power in the world as it was white hot. In real dollars, operating profit in the quarter came in at $107mm, which was triple the level seen in 1Q19 – which is a huge statement as to how much the company has cleaned up its distribution and cost structure over the past two years. The company also guided up 2Q revenue to 70% (roughly double the consensus), and took up EBIT to $40mm-$45mm, which compares to the consensus at –($48mm). We’re at $71mm with a bias to the upside. All in, this was a super quarter for UA.
In order to keep numbers from getting out of hand, management kept a lid on 2H guidance – citing the impact of closing brand-dilutive doors, continued supply and demand constraints, a lessening impact from mask sales, and the lingering impact of weak traffic at retail because of COVID. The rationale was and is valid, but it simply does not jibe with the numbers. Consider this, assuming that the company hits the high end of 2Q guidance (which we think it will blow away), then we’ll be sitting here with $152mm EBIT dollars in the bag through the first half of the year. That means that to hit full year guidance, the company will need to generate between $53mm and $88mm for the ENTIRE second half of the year (yes, the half that will benefit from reopening). To put this into context, in the darkest days of the brand rolling over with a bloated cost structure (2017), it generated $152mm in EBIT in the back half. 2018 was an equally bloody year for UAA, and the company generated $183mm in 2H. To get to the company’s guidance we need to assume that the wheels completely fall off this story, and that revenue declines double digits on top of a spike in the structure. That simply isn’t going to happen.
Is this stock cheap today at $23.50? Of course not…it’s trading at 88x consensus earnings and 30x EBITDA. But the underlying earnings and cash flow numbers being used in those calculations are flat-out wrong. Our $351mm EBIT number is 56% ahead of the consensus for the year, and our EPS estimate of $0.50 is 70% ahead of the guide. On our 2023 EPS number, we’re looking at a high-20s multiple with where the stock is today. To be clear, I’d rather own Nike or Adidas (both Hedgeye Best Ideas) at 30x earnings than UAA at 28x – as those brands are far more relevant in the eyes of the consumer globally. But we’re only a third of the way through a material upward revision cycle at UAA, which we think is good for a stock starting with a $3 when all is said and done. UAA remains near the top of our Long Bias List.
-- McGough
