To The Moon

$Under Armour Class A(UAA)$ $Under Armour(UA)$ Under Armour is in a transitional phase, reflecting its efforts to regain consistent growth and profitability after facing several years of challenges.

The company has struggled to maintain market share in its largest revenue-generating region due to strong competition from Nike, Adidas, and Lululemon, as well as changing consumer preferences. Under Armour's focus on performance gear has limited its appeal as a lifestyle brand, a space where competitors like Nike excel. Issues such as inventory mismanagement, supply chain disruptions, and high SG&A expenses have pressured margins. Leadership turnover, including founder Kevin Plank stepping down as CEO in 2020, reflects an evolving strategic focus.

Earning Overview

Quarterly Revenue

Under Armour's most recent earnings report highlights key metrics and expectations for its fiscal year 2024. The company projects a revenue decline of 3-4%, slightly tightening its previous forecast of a 2-4% drop. Gross margins are expected to improve by 120-130 basis points, reflecting better cost management. Operating income is forecasted between $287 million and $297 million, with adjusted figures reaching up to $320 million when excluding litigation reserves. Adjusted earnings per share are estimated at $0.50-$0.52, factoring in benefits from the sale of its MyFitnessPal platform.

Revenue & Expenses Breakdown

In addition to financial figures, the company is managing stable selling, general, and administrative expenses, with capital expenditures now expected between $210 million and $230 million, down slightly from earlier estimates. These results indicate ongoing efforts to stabilize and improve profitability amid a challenging market environment

Fundamental Analysis

Revenue and Growth: Under Armour’s revenue has faced challenges, particularly in its North American market, which represents a large portion of its total sales. However, the company has shown growth in international markets, particularly in Europe and the Asia-Pacific region. For Q2 FY2024, revenue declined by 10.7% year-over-year, reaching $1.4 billion.

As of the latest reports, Under Armour (UAA) has a total debt of approximately $1.33 billion, with long-term debt accounting for about $595 million. This level of debt is significant but manageable relative to the company's market position. Under Armour’s debt-to-equity ratio stands at 0.67, indicating moderate financial leverage. Net debt has been reduced, signaling efforts to strengthen the balance sheet​.

The company’s debt is composed of both short-term and long-term liabilities, and while it has a healthy current ratio of 2.18, its cash position of $530.7 million is somewhat limited in covering this debt. Over the past year, Under Armour has worked to reduce its net debt, which currently stands at negative $801 million, signaling a slightly strained cash position.

Inventory

Inventory Management: Inventory levels stood at about $1.1 billion in Q2 FY2024. Under Armour has been actively managing its inventory turnover to avoid markdowns and excess stock, which has been a risk for profitability​.

Earn Per Share

In Q2 FY2024, Under Armour reported earnings per share (EPS) of $0.30, exceeding analyst expectations of $0.19. This reflects a significant year-over-year improvement from $0.24 in the same quarter last year, highlighting better cost management and profitability despite revenue challenges.

Free Cash Flow

Quarterly FCF

Under Armour's free cash flow (FCF) has been variable, reflecting shifts in its profitability, working capital management, and capital expenditures. For Q2 FY2024, the company focused on improving operational efficiencies and inventory management, which likely impacted its FCF positively compared to past quarters. Precise FCF numbers for this period would require reference to its most recent cash flow statement, as reported in earnings releases or filings.

Technical Analysis

Under Armour (UAA) stock has been volatile and is currently navigating through a transitional phase. For Q2 2024, the company saw mixed performance, with revenue meeting expectations despite challenges in some regions like Asia Pacific and Latin America. However, stronger-than-expected earnings per share (EPS) and an improved gross margin—driven by lower freight costs—provided some positive momentum​.

Technically, Under Armour's stock shows some signs of recovery, with analysts projecting potential growth despite a history of decline. The stock had fallen by 55% from early 2021 to mid-2023, but recently, it has been trading at a relatively low P/E ratio of 7.79, which suggests that the stock might be undervalued​, There's some cautious optimism, especially as Under Armour's international markets like Europe and the Middle East are performing well, driving overall growth.

Risks and Challenges

Market Competition

Under Armour continues to face intense competition from industry giants like Nike, Adidas, and Lululemon. These companies have stronger brand recognition, deeper customer loyalty, and greater financial resources, which make it difficult for Under Armour to differentiate itself. The competition is particularly strong in footwear and athleisure apparel, areas where Under Armour has struggled to capture significant market share.

North American Dependency

North America remains Under Armour's largest market, contributing a substantial portion of its revenue (over 60%). This geographic concentration exposes the company to risks tied to economic cycles, consumer preferences, and market saturation in its core region. Declining sales in North America have been a significant challenge in recent years.

Inventory and Supply Chain Issues

Like many companies, Under Armour has faced supply chain disruptions, which have affected its ability to manage inventory efficiently. Excess inventory can lead to heavy discounting, which impacts margins and profitability. Managing inventory levels and improving turnover are ongoing challenges.

Under Armour has undergone significant leadership changes in recent years, with founder Kevin Plank stepping down as CEO. While new leadership could bring fresh ideas, such transitions often carry execution risks as new strategies are implemented.

Valuation

Price-to-Sales (P/S) Ratio: The company’s P/S ratio 0.75 remains lower than its competitors, implying that Under Armour could be undervalued in terms of revenue generation compared to Nike and Adidas.This ratio indicates that investors might be paying less for the same revenue stream, making it an attractive proposition if the company can manage to boost its sales growth in the coming years.

Discount to Peers: Analysts point out that Under Armour is trading at a significant discount compared to its competitors, such as Nike, despite similar revenue trends and brand strength. This disparity might provide an opportunity for investors, particularly if the company successfully executes its transition strategy.

Under Armour’s long-term growth potential is also a crucial factor in its valuation. Despite its current struggles, analysts project significant upside if the company can execute its recovery plan, particularly through improved margins and international expansion. Some projections predict long-term price increases of more than 170%.

Conclusion

Under Armour is currently somewhat undervalued, especially given its price fluctuations. Despite the company's challenges in its transition phase and some volatility in its stock price, there is still optimism about its recovery and growth potential. The stock has shown some recent price gains, with a 26.44% increase over the past six months, although it remains below its 52-week high. From a valuation perspective, UA has a forward price-to-earnings (P/E) ratio of 22, which could indicate that the stock is fairly priced relative to its earnings expectations.

UA may not be a bargain at its current price point, it still has upside potential, particularly for long-term investors willing to bet on the brand’s eventual recovery.