VALUATION HIGHLIGHTS

1. Performance Apparel constitutes 62% of the Trefis price estimate for Under Armour's stock.
2. Footwear constitutes 25% of the Trefis price estimate for Under Armour's stock.

WHAT HAS CHANGED?

1. Under Armour Saw A Mixed Q1

Under Armour reported mixed fiscal Q1 results with the sector facing ongoing inventory issues and gross margins still under pressure. Q1 revenue was down 2% year-over-year (y-o-y) on a constant currency basis to $1.32 billion, with wholesale revenue down 6%. After the COVID hit, Under Armour had gross margins right around the magical 50% level, but the industry inventory pressures have pushed the margins back down to 46.1% for the June quarter. In comparison, rival Lululemon Athletica has margins approaching 60%. The biggest issue remains the high inventory levels in the sector. Under Armour ended Q1 with inventory at $1.3 billion, up 38% from prior year levels, though in line with expectations due to leaner inventories in 2022.

Note: Under Armour's FY'23 ended on March 31, 2023. Q1 FY'24 refers to the quarter that ended on June 30, 2023.

2. Outlook For FY 2024

Full-year EPS is expected to come in the range of $0.47 and $0.51. Revenue is expected to be flat to up slightly in FY'24. • The company's gross margin is expected to be up 25 to 75 basis points compared to the prior year's rate of 44.9%, driven by supply chain tailwinds related to lower freight costs, partially offset by mix impacts related to higher off-price revenue and higher promotions expected in the company's direct-to-consumer business. Outside of the retail issue in North America where sales are forecast to dip 3% to 4% this FY, Under Armour is seeing a booming business. The Europe/Middle East/ Africa and Asia Pacific regions both expect double-digit sales growth rates for FY'24.

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:

• Apparel Revenues : Under Armour's Apparel Revenues grew from $3.3 billion in 2020 to around $4 billion in 2023. We expect the figure to increase gradually, reaching the $5 billion mark in the long run. If revenues only reach $4.5 billion by the end of our forecast due to a slower-than-expected apparel market growth in the U.S., it will imply a nearly 5% downside to the Trefis estimate.


• Apparel Gross Profit Margin: Under Armour's Gross Profit Margin has stayed in the region of 45%-50% 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. Going forward, we expect this figure to hover around 48% in the long run. If margins increase to about 52%, there could be an upside of about 3% to the Trefis price estimate.

BUSINESS SUMMARY

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 come from North America (about 65% in FY2023). 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 90% 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.

KEY TRENDS

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 retailer also increased the average square footage of its factory stores in 2023, 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 34% of Under Armour's net sales (as of March 31, 2023), 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.

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.