- Performance Apparel constitutes 59% of the Trefis price estimate for Under Armour's stock.
- Footwear constitutes 18% of the Trefis price estimate for Under Armour's stock.
- Accessories constitute 9% of the Trefis price estimate for Under Armour's stock.
WHAT HAS CHANGED?
- Latest Earnings Q3'20
Under Armour delivered a robust performance in its fiscal third quarter (three months ended September 2019), with the company beating consensus estimates on earnings and revenues. Overall, Under Armour's revenues for the quarter remained flat at $1.4 billion, as strong performance in the footwear segment was offset by a rather soft performance in the apparel division. Moreover, UA reported a profit per share of $0.09, as compared to a loss per share of $0.40 in the previous quarter. However, the company's gross margin decreased by 40 basis points to 47.9% compared to the prior year driven primarily by negative impacts from COVID-19 related discounting and product mix. For full-year 2020, the athletic apparel retailer its revenues to decline in the high teens range while the company is expected to report a loss per share in the range of $0.47 to $0.49.
- Impact Of COVID-19
Under Armour stock has lost a bulk of its value since the outbreak of coronavirus. Moreover, the company has temporarily shuttered stores in North America and Europe, as a result of continued measures to help slow the spread of COVID-19. Moreover, major sporting events, including the Olympics, NBA, and Euro 2020 have been suspended/postponed, which is expected to materially impact the company's top line over the coming months. Under Armour also withdrew its earnings guidance provided after the release of its Q4 results (ending December), citing uncertainty relating to the potential impacts of COVID-19 on the company’s business operations - including its duration and its impact on the overall demand for merchandise.
- The Company Sees Heavy Growth In Emerging Asian Markets Especially In China
Like many of its competitors, Under Armour has set its sights on Asia as a massive top-line booster. In FY 2019, the company managed to post a 14.2% increase with strong, balanced wholesale and direct to consumer growth, and continued strength in China, Korea, and Australia. In addition, revenue at EMEA was up 5% on a currency-neutral basis with particular strength in the UK, Germany, and Spain. We expect international revenues to buoy the overall top line going forward.
- Direct To Consumer Channel Sees Steady Growth
Further, after taking a massive hit on the wholesale front in 2017, Under Armour decided to up its investment in its direct to consumer channel. Direct to consumer revenue has grown by about 4% since 2017. The financials were driven by continued strong results in its international and e-commerce businesses. Further, DTC represented nearly 35% of the total global revenue. With continued efforts, we expect this figure to expand in the coming years.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of Under Armour's value that present opportunities for upside or downside to the current Trefis price estimate:
- Retail Apparel Revenues : Under Armour's Retail Apparel Revenues increased from $122 million in 2009 to around $1075 million in 2019. Under Armour's focus on innovation, as well as the addition of new speciality and factory stores, helped drive sales. That said, the company has suffered heavily in a slowing apparel market. Going forward, we expect the figure to increase at a lower-than-expected rate, crossing the $1.2 billion in the long run. If revenues decrease to $900 million due to a slower-than-expected apparel market growth in the U.S., it will imply nearly 5% downside to the Trefis estimate.
- Apparel Gross Profit Margin: Under Armour's Apparel Gross Profit Margin has stayed in the region of 43%-48% historically, despite the downward pressure of increased competition, the negative impact of currency fluctuations, and increased air freight costs. The company has been able to consistently introduce new products and increase its average unit prices, which has helped sustain margins. However, last year, apparel revenues were hurt on the back of a slowing apparel market. In light of this, we expect this figure to be at 42% in the long run as the apparel market continues to weigh on margins. If margins increase to about 48%, there could be an upside of about 6% to the Trefis price estimate.
Under Armour is a manufacturer and distributor of performance apparel, footwear, and accessories for men, women, and children. The company's products use moisture-wicking fabrics that are engineered in many designs and styles for wear in nearly every climate. The company sells its products worldwide, though a significant percentage of sales coming from North America (about 70% in 2019). The company's distribution includes both wholesale and retail channels. Its products are worn by athletes at all levels, from youth to professional, on playing fields around the globe, as well as by consumers with active lifestyles.
SOURCES OF VALUE
The primary sources of Under Armour's value are its apparel and footwear businesses, and together they contribute around 75% of Under Armour's value, as per our estimate. Apparel is more valuable than Footwear and Accessories businesses for the following reasons:
Market leader in performance apparel market
Under Armour is the current market leader in the performance apparel market with over 70% market share. All three apparel gear lines of the company, i.e., HEATGEAR, COLDGEAR, and COLDBLACK, are extremely popular among professional athletes as well as consumers. However, in the footwear and accessories businesses, Under Armour faces tougher competition from established players such as Nike and Adidas.
Under Armour is expanding its own stores leading to higher overall gross margins due to a shift in sales mix
Gross margins in the direct-to-consumer channel are nearly 30% higher than in the wholesale channel.
Expanding its direct-to-consumer segment is a major focus for Under Armour. The company increased its factory store count in North America to 169 stores in 2019 and continues to focus on e-commerce sales. The retailer also increased the average square footage of its factory stores in 2019, including more product categories within its stores. As direct revenues contribute more to net sales, we expect gross margins to increase.
Focus on the international business
While international sales currently contribute only ~30% of Under Armour's net sales (as of December 31, 2019), the company plans to increase this figure further going forward.
The company plans to expand in the key markets of Asia (China, Korea, and Japan), Europe (U.K., France, and Germany), Australia, New Zealand, and Latin America (Brazil, Mexico, Argentina, and Chile) to enhance its international business.
Under Armour’s management has always been upfront about its ambition to turn the brand from a purely American to a global one. That ambition received a significant boost late in 2013 with the opening of an Under Armour Experience store in Shanghai’s brand new mall, the Jing An Kerry Centre. This is a highly unusual venture with a unique retail concept: The Experience store features an immersive wrap-around video experience that tells Under Armour’s story. Another store, carrying a collection of Under Armour product, is connected.
Focus on the women's business
Being previously popular for its men's products, Under Armour is now focusing on women's products to enhance its revenues. It is making efforts to elevate its brand image among women customers by altering the retail experience at its stores to suit them.
The company is taking several measures to accomplish this goal. It has expanded its creative talent within the women’s business and altered its product portfolio and retail presentation to suit the tastes of female customers. Additionally, the retailer has also signed endorsement deals with female athletic and fitness icons such as Misty Copeland, Gisele Bundchen, and Lindsey Vonn.