Under Armor (UA, UAA) remains on track for a strong turnaround, but the market reacted negatively last week to some transitional supply chain issues. The athletic apparel maker has successfully transitioned back to a performance brand after years sidetracked on junk apparel sold to off-price channels. My investment thesis remains ultra Bullish on the stock following the irrational dip since the mid-November highs above $ 27.
The stock market is a fickle place with investors wiping out years of a successful transition in just months due to a tough transitory period in the athletic apparel sector. In addition, Under Armor is causing confusion by shifting the fiscal year end to March and virtually skipping FY22 with the March quarter in a separate period.
Regardless, the company again smashed analyst estimates for Q4’21 with revenues beating estimates by $ 60 million for 9.3% growth. The key bottom line doubled analyst EPS estimates at $ 0.14.
In the process, Under Armor reported recorded numbers for 2021. While revenues were up, the athletic apparel company is now a money making machine after years where aggressive spending hid otherwise decent gross profits. Now that the company is focused on profits over pure growth, Under Armor finished the year with net income of $ 397 million for an adjusted EPS of $ 0.85.
The company now has an incredible cash balance of $ 1.7 billion, placing the net cash position at a strong $ 1.0 billion. The enterprise value sits at an interesting $ 6.7 billion. Under Armor will have the ability to invest future cash flows possibly into stock buybacks with the cash balance suddenly building up to a sizable position.
While some growth normalization was expected, the market is now extrapolating the forecasted FY23 growth rates into a sign of weakness. Even worse, Under Armor predicted a mid-single digit revenue growth rate in FQ1’22 actually beating prior forecasts, but the market was unhappy about a 200 basis points hit to gross margins.
Under Armor reported Q4’21 gross margins of 50.7% with full-year 2021 margins at an impressive 50.3%. The company hit 50.0% gross margins last Q1 suggesting guidance has margins dipping back to only 48.0%.
The guidance is clearly transitional due to elevated shipping costs of 240 basis points with the ongoing supply chain issues. Under Armor had already hinted at cutting orders for the Spring to help the supply chain catch up for future orders. The company originally suggested this was a potential problem with meeting revenue targets, but the company guided March quarter revenue targets up.
Investors need to keep in mind that Under Armor hit these record sales and profits while making a strategic decision to reduce sales in the off-price channel and exiting approximately 2,500 undifferentiated retail doors in North America. The athletic apparel retailer is seeing strong benefits from focusing on brand health.
Market Lacks Confidence
The market lacks confidence in Under Armor, but the company has outflanked NIKE (NKE) recently. Under Armor did not have the same supply chain issues due to COVID-19 manufacturing plant closures in Vietnam due to better diversification in other regions.
After nearly 5 years of struggling to match the growth rates of the much larger NIKE, Under Armor has now surpassed the growth rates of the giant sector. For the current quarters, Under Armor is guiding towards mid-single-digit growth while Nike had previously guided to only low-single-digit growth for the quarter that included the key December holiday month.
Under Armor had already surpassed the gross margins produced by NIKE. Historically, the market made far too much out of the profit picture of Under Armor due to ignoring the normally solid gross margins providing the gross profits needed to produce solid net income. The issue was always whether Under Armor should focus more on growth by investing in the business.
Over the last 5 years, Under Armor had produced a 500 basis point margin improvement with NIKE after watching the gross margin dip towards the 45% level of the industry giant. The company is guiding towards a speed bump in margins over the short term, but Under Armor expects the extensive freight costs to revert to previous levels in the next year.
Again, Under Armor is starting to produce faster revenue growth along with higher gross margins, making the stock more appealing than the overvalued NIKE. The market might lack confidence in the turnaround, but the numbers are very supportive.
No reason exists for NIKE to still trade at over 4x FY23 sales while Under Armor trades at closer to 1x sales following the 12% stock hit on Friday. In fact, the stock trades at only 1x EV / S targets, which is a ridiculously low multiple in comparison to NIKE.
The key investor takeaway is that Under Armor remains far too cheap with the recent sell-off being ridiculous considering the ongoing turnaround into a healthy brand with strong profits. Investors should use this weakness to own the stock, though the next few quarters will be highly volatile due to the supply chain issues and the transition of the fiscal year to ending in March.