At long last, beleaguered Under Armour (NYSE: UAA)
has reported an earnings beat. It’s been a while but for once analysts have underestimated what the company was capable of. On Friday morning, the Baltimore headquartered athletics apparel company reported their Q2 earnings which beat on topline and revenue numbers.
However, EPS was still firmly in the red while revenue was down 40% year on year and despite a 19% pre-market jump in shares, investors quickly decided that the beat wasn’t strong enough. The company’s CEO, Patrik Frisk, didn’t pull any punches when he said “while we performed better than expected, we still experienced a significant decline in revenue across all markets, [due to] the majority of our own stores and wholesale locations” being closed for most of the last quarter due to the COVID-19 pandemic.
Shares had rallied 30% over the previous fortnight on growing optimism regarding the report, but they quickly fell 13% from Friday’s opening high as investors digested the numbers. Then on Monday, they finished down another 8%. Wall Street can be a cruel stomping ground and investors’ patience must be starting to wear thin. As we’ve written before, this is not the first time that Under Armour shares have failed to deliver the goods.
That being said, there’s still a turnaround story in the works and even with the post-earnings fall shares are still up 35% from last quarter’s lows. Granted, they’re down a full 50% from pre-COVID highs but Wall Street likes to focus on the road ahead and everyone loves a comeback story.
On Monday, Susquehanna was out with an upgrade to the stock, moving it from Negative to Neutral. They believe the company is well-positioned for next year despite the pandemic interrupting management’s planned restructuring of its main business lines. Susquehanna analyst Sam Poser hadn’t been afraid to give a price target of $4 for the shares back in May after they reported a bad Q1 so his upgrade this week is worth taking notice of. As part of the move he more than doubled that price target to $9.
He added in a note to clients that "UAA must, in our opinion, pull back on its presence in the moderate channel at retailers such as Kohl's, Famous Footwear, DSW, SCVL, TJX, ROST, and BURL in order to become the premium brand it once was and to which it aspires to be. We have said for some time that the Under Armour brand belongs in the moderate channel (not the off-price channel)”.
Best Path Forward
This is an interesting take on the best path forward for a company that once rubbed shoulders with Nike (NYSE: NKE). Though it has struggled to remain competitive even as athleisure apparel companies like Lululemon (NASDAQ: LULU) have emerged, it’s not out of the fight yet. Management is cautiously optimistic and it will be interesting to see if investors buy into their message.
Though pragmatic with Friday’s earnings report, Frisk finished his comments with an upbeat tone when he said “now, with most of these doors reopened, we are encouraged by some of the momentum we've experienced in June and July.” It’s important to note that the company still has $1 billion in cash and they reported a significant jump in online sales for the past quarter, indicative of the ongoing shift to e-commerce shopping.
With support around the $9 level, there’s an interesting risk/reward profile in play with Under Armour. You have to be wondering just how much lower can shares go with so much negative news already reported this year. Is the worst-case scenario or something like it already effectively priced in? Could a few surprise wins in the coming months open entice the bulls to come back in? The company may be down, but they’re certainly not out.
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