Is It Time To Short Under Armour?

Photo Credit: U.S. Department of Agriculture

Under Armour, Inc (UA) Consumer Discretionary - Textiles, Apparel & Luxury Goods | Reports April 21, Before Market Opens

What was once thought to be Nike’s biggest threat, Under Armour is beginning to fall from investor’s good graces. The footwear and apparel company is scheduled to report first quarter earnings tomorrow with expectations generally low for the first time in a while. Earlier this month, Morgan Stanley issued a somber note suggesting Under Armour would miss its quarterly sales target. At the same time UA sponsored golfer, Jordan Spieth, had a historic collapse at the Masters, all of which put the stock in a tail spin. If earnings flop just a few weeks later, the stock might be in even more trouble

The Estimize consensus is calling for EPS of $0.03 on revenue of $1.06, 1 cent higher than Wall Street on the bottom line and $13 million. Since Morgan Stanley’s downbeat note, per share estimates have been cut by 44%. Still estimates forecast favorable comparisons with EPS predict to rise 11% on a 30% increase in sales. The stock typically exhibits strong upward mobility around earnings season. On average, shares climbed 2% in the month prior, reaching as high as 3% 30 days following earnings. 

Apart of Jordan Spieth and the Morgan Stanley note, Under Armour made headlines when it completed its stock split. The split awarded Class A shareholders a stock dividend of the newly issued Class C shares. Simply, the move was designed to keep the current CEO, Kevin Plank, in firm control of the company. After the split, Plank now owns 15.9% of the company.

Meanwhile, Under Armour remains focused on brand development, expanding its direct to consumer (DTC) business and bringing its new technology based products to the market. Despite Speith’s recent misfortunes, Under Armour has been wildly successful representing some of sports budding stars. The company currently represents Stephen Curry, Tom Brady, Jordan Spieth and recently teamed up with Dwayne, “The Rock”, Johnson, to promote the Under Armour Healthbox. Due to the success of the Golden State Warriors, the Curry franchise is expected to carry footwear into the near future. Running styles have also found success with Under Armour expected to double its inventory on running shoes priced over $100.

On the downside, early indications are gross margins should decline due deep discounts, exchange rate volatility and unbalanced product mix. Furthermore, the first quarter is expects to be the smallest DTC quarter in terms of revenue mix. The footwear business is leaps and bounds ahead of the overall business, which isn’t a good thing. Unfortunately this trend of lower margin products should continue to put downward pressure on earnings.