Under Armour (NYSE:UAA) reports before the opening bell on Thursday morning, April 27, 2017.
Analyst consensus is expecting a loss of $ 0.04 per share (vs. a $ 0.04 profit a year ago) on $ 1.1 billion in revenue.
Year-over-year (y/y) expected revenue growth (assuming the $ 1.1 bl is met) will be 6%, down from 12% last quarter, and the two slowest quarters of revenue growth for UAA since – well – as long as I’ve been modeling the company which goes all the way back to March, 2009. (Under Armour came public in Q4, 2005.)
The best analog – ironically – may be “ShoeDog” – Phil’s Knight’s great book about Nike’s (NYSE:NKE) history that demonstrated how Nike, even during the 1970’s as a young company – continued to stretch the limits of growth for both athletic/track shoes and then apparel, and stretched their bank lines and their bankers patience.
Under Armour, under their exceptional CEO Kevin Plank, simply outran their coverage (so to speak, and no pun intended) and with the retail market under pressure in the US, (thinking of the Sports Authority liquidation) and with the cutthroat apparel market, not to mention the ascendancy of Adidas, Under Armour’s growth has slowed considerably.
So where does that leave us today in front of earnings?
1.) Under Armour’s forward revenue and EPS estimates are still declining.
|Q1 ’17 (est)||Q4 ’16||Q3 ’16||Q2 ’16|
|2019 EPS est||$ 0.59||$ 0.65||$ 1.31||n/a|
|2018 EPS est||$ 0.50||$ 0.54||$ 0.83||n/a|
|2017 EPS est||$ 0.42||$ 0.46||$ 0.69||n/a|
|2019 est EPS gro rt||18%||16%||58%|
|2018 est EPS gro rt||19%||20%||20%|
|2017 est EPS gro rt||-7%||2%||15%|
|2019 rev est||$ 6.9||$ 7.3||$ 9.2|
|2018 rev est||$ 6.1||$ 6.3||$ 7.47||$ 7.7|
|2017 rev est||$ 5.35||$ 5.46||$ 6.07||$ 6.2|
|2019 est rev gro rt||14%||16%||24%|
|2018 est rev gro rt||14%||16%||24%||24%|
|2017 est rev gro rt||11%||13%||23%||25%|
- Source: Thomson Reuters I/B/E/S estimates as of 4/26/17
- EPS = earnings per share
- est = estimate(d)
- Revenue in billions of $ ‘s
Growth expectations have been curtailed considerably (note the trend in the 2017 EPS and the trend in the three forward years of revenue estimates.
While I like that expectations are being reset, the downward revisions have to stop and investors need to see estimates stabilize.
2.) Finally cash-flow is improving:
|CFFO||capex||FCF||Capex % of CFFO|
|Q4 ’16||$ 305||$ 387||($ 82)||127%|
|Q3 ’16||$ 177||$ 396||($ 219)||224%|
|Q2 ’16||($ 26)||$ 414||($ 440)||a lot|
|Q1 ’16||($ 36)||$ 329||($ 364)||a lot|
|Q4 ’15||($ 44)||$ 299||($ 343)||a lot|
|Q3 ’15||($ 24)||$ 257||($ 281)||a lot|
- CFFO – cash generated from operations
- capex – capital expenditures
- FCF – free-cash-flow
- All numbers “4Q trailing”
- capex includes acquisitions
There is a lot more going on here than meets the eye. Cash-from operations has finally turned positive, which means the growth of the company isn’t out running its ability to finance that growth, and that is reflected in the growth of L-T debt, which rose from $ 47 million to almost $ 800 million between March ’14 and Dec ’16. (Remember the right side of the balance sheet finances the left side of the balance sheet.)
Still I’d like to see Under Armour start to generate some free-cash-flow.
Capex: capex includes acquisitions and as you can see Under Armour was spending money on “capex” faster than a teenager with a hit record. Capex was outrunning cash-from operations considerably and if the quarters had been expanded, Under Armour hadn’t generated any free-cash-flow since 2014.
The bright side to this is that – as we have seen revenue growth slow – it looks like the cash-flow statement could starting to resemble a more typical mid-teens growth company.
One final note on the balance sheet and statement of cash flows: after the January ’17 quarter was announced Standard & Poor’s reduced their credit rating on Under Armour to BB+ (Under Armour’s senior unsecured credit rating) and what surprised me about that was that Under Armour had a low investment-grade credit rating at all. This is actually a positive since it gives Under Armour flexibility with the capital structure and means that the Treasurer has a few options in terms of raising capital.
However that leads to one more negative:
|Quarter||F/d shares outstanding|
|Q4 ’17 (est)||458 ml|
|Q3 ’17 (est)||456|
|Q2 ’17 (est)||455|
|Q1 ’17 (est)||453|
|Q2 ’16||443 ml|
|Q1 ’16||443 ml|
|Q4 ’15||443 ml|
- Actual quarters based on fully-diluted shares outstanding reported on earnings release
- “estimated” shares are based on one sell-side model (sorry, cannot recall the broker)
Here is the point: if Under Armour has to shore up their balance sheet and the rating agencies get nervous, Treasury has to sell common equity which is another strike against the shareholder (UA/UAA) besides the slowing growth.
It will be interesting to see “fully-diluted” shares outstanding tomorrow morning.
Analysis / conclusion:
Under Armour management guided to 11% – 12% revenue growth for full-year 2017 and the current estimate (see first table above) is at 11% already, in addition to an operating loss of $ 320 million.
Given the rapidity of the Under Armour stock decline, there is likely no good news to be had in tomorrow’s report, but I would like to see:
- Revenue guidance for ’17 not get worse.
- More focus on SG&A (sales, general and admin expenses) which peaked at 44% of revenue two quarters ago and is now down to 32%. Kevin Plank reacted quickly to the slowing revenue.
- Cash-flow and free-cash-flow start to normalize
- Less shareholder dilution
In business school, students are taught the 4 phases of a typical business: hyper-growth, normal growth, maturity and decline.
Readers could see that with large-cap tech stocks from the 1990’s if you’ve been around long enough.
One near-term answer for Under Armour is lower SG&A and less capex spending, to shore up earnings and cash-flow.
Sustained guidance (no change in ’17 guidance) would tell investors that the business is starting to stabilize.
Nike is a classic example of a business much further along the life-cycle curve, but has continued to reinvest itself for 3.5 decades now.
Under Armour should be entering the next phase of its life: more stable, more consistent, growth. However, don’t be a hero. If you’ve avoided the stock until now, wait and see how the first quarter turned out and what management says about 2017 guidance, and be patient.
Here are previous articles on Under Armour and Nike here and here.
A small position has been purchased for one client that wants to own the stock, but it is a lot more interesting today at $ 19 – $ 20 per share incorporating slower growth than at $ 50.
Disclosure: I am/we are long UAA, NKE.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.