Under Armour Earnings, rooting for the Underdog?

Under Armour, Inc. $Under Armour Class A(UAA)$, reports earnings before market open on Fri 6 May.

The US sports footwear and apparel used to be much coveted, second only to Nike in US sales, and its stock a darling of analysts and investors. However, it has fallen out of favour on both counts, far below its heydays. Still, it is the fourth largest player in the sector globally (see below):

source: alltopeverything

Fundamental Game

Main reasons for UAA steep decline in revenues and stock price from 2020 are:

• Affected by stores closure, and having to dispose excess inventory at huge discounts during pandemic, diluting brand value and putting pressure on margins
• Reluctance to enter the athleisure apparel segment during pandemic and work-from-home period, unlike its competitors Lululemon and Nike, losing big time
• Supply-chain disruptions at factories in China and Vietnam, affected by lockdowns, geopolitical crisis and rise in shipping and materials costs
• Rise in inflation dampening consumers’ discretionary spending, reducing demand for sports gears

There are however rising optimism and positive outlook, that might signal a turnaround:

• Turnaround plans have worked to control cost, cut manpower and maintain strict inventory levels, resulting in gross margins of 50.4% for first time in FY2021
• Ditching unprofitable acquisitions such as MapMyFitness and MyFitnessPal apps
• Direct to Customer (D2C) strategy, reducing reliance and cut of profits by wholesalers and sports retailers
• Growing International sales, particularly Asia Pacific markets, now contributing 33% of sales. It still lags behind competitors such as Nike in this area with over 60% sales.

Under Armour also sponsored a number of world class athletes, the most famous arguably is Stephen Curry, NBA all-time #1 3-point shooter and triple NBA champions, who seems to rediscover his “mojo” recently. Its other famous brand ambassadors also have stories of revival of fortunes, “second coming” or “reincarnation” to new roles in sports they have excelled in (see below).

source: Adapted from Under Armour / Forbes

Would Under Armour own revival story parallel those of its sponsored sporting heroes?

For starters, UAA has reported a few solid quarters, and is expected to beat estimates on both revenue and EPS for the coming Q1 2022. It’s PE Ratio is at a much more attractive 19.70, as its share price has fallen greatly, versus Nike (32.59) and LuluLemon (48.27) respectively. With analysts giving its fair value at $20, UAA is also significantly undervalued at latest session’s closing price of $14.29.

UA Earnings Estimates Q1 2022 source: Trefis

UAA vs main competitors’ PE Ratio source: Motley Fool

Technical Play

$Under Armour Class A(UAA)$ share price has fallen -23.91%, below $Nike(NKE)$ +23.84% and $Lululemon Athletica(LULU)$ +48.88%, both have recovered and resumed growth since the start of pandemic 2020, even outperforming the Index $S&P 500(.SPX)$ in long stretches (see below).

UAA however, has clawed its way back from the doldrums and is performing better than the #2 competitor $adidas AG(ADDYY)$ at -31.83%. It has some way to go to catch up with NKE and LULU, probably needing a few more quarters of solid outperformance.

UAA share price vs main competitors ADS, NKE, LULU. SPX provided for reference

UAA Daily chart still paints a challenging picture, with steep downtrend since the all-time-high in Nov 2021, decline which is mainly due to supply chain and inflationary pressures mentioned above (see below).

UAA Daily chart

Earnings beats and positive forecast would be an offensive play, with potential rally of +10.08% to $15.73 (MA 20 line). Substantial outperformance might see price eventually peaking in mid-term to $16.90 (+18.26%), corresponding to 0.236 Fib level.

Earnings missed and weak forecast would be the defensive play, with price on downwards spiral to $12 (-16.03%) and potentially even to peak pandemic lows of around $10 (-30.02%).

Final Word

There is a tendency to root for the underdog in sports and dare I say investing. However, it is better to remain objective and trade the price action. At the moment, $Under Armour Class A(UAA)$ might be more of a trading play than longer term investment, until we see results of solid outperformance over several quarters.