Home Business Sponsorships Raise Red Flags For Analysts as Under Armour’s Operating Losses

Sponsorships Raise Red Flags For Analysts as Under Armour’s Operating Losses

by Inside Out

Under Armour Inc. shares closed Thursday up 4.6% after the athletic gear company reported revenue that exceeded expectations. Still, analysts are calling the beat “weak” and raised red flags about liabilities and the burden of outlays for the company’s big-name sponsorship arrangements.

Under Armour UA, +2.30% UAA, +2.00% said second-quarter sales totaled $1.17 billion, up from $1.09 billion in the same period last year. The company had a wider loss of 21 cents per share, compared with 3 cents per share last year. Adjusted losses were 8 cents per share. The FactSet consensus was for revenue of $1.15 billion and a loss of 8 cents per share.

However, Wedbush analysts led by Christopher Svezia called the beat “low quality.”

“A return to growth in North America should also be taken in context of its sales into the off-price channel, not necessarily an acceleration in brand demand,” Wedbush said. “Further necessary liquidation measures also led to a cut in outlook for gross margin, for which the company missed Street expectations in 2Q.”

Gross margin decreased about 110 basis points to 44.8% “due to inventory management initiatives and a $6 million impact related to restructuring efforts,” Under Armour said. Adjusted gross margin decreased 60 basis points to 45.3%.

Wedbush rates Under Armour shares neutral with an $18 price target.

GlobalData Retail Managing Director Neil Saunders highlighted the company’s operating losses, which were $104.9 million for the quarter, greater than the $4.79 million losses last year.

“Admittedly, $79 million of this is attributed to restructuring costs, but even when these are stripped out, the company still lost $26 million on a straight operating basis,” Saunders wrote.

Liabilities have also climbed, up to $2.32 billion for the quarter from $1.87 billion the prior year.

“Looking ahead, the burden from sponsorship arrangements is far higher for Under Armour than for most sporting brands, and an increase in store rent costs will put further pressure on both profits and the balance sheet,” Saunders aid.

Under Armour athletes include NBA superstar Steph Curry, with Chief Executive Kevin Plank calling out the Curry 5 basketball shoe and the launch of ballerina Misty Copeland’s training collections as “highlights” for the year so far.

Dwayne “The Rock” Johnson also had a sellout shoe, with merchandise gone in 30 minutes.

“The dynamic of a poor top-line performance and a deteriorating financial position squeezes working capital and cash and means the company has less room for maneuvering going forward,” Saunders wrote. “This is an uncomfortable position to be in as demand moderates and competitive forces become sharper.”

Moody’s Assistant Vice President Mike Zuccaro is less concerned.

“We expected 2018 to be a challenging year and that it would take some time to improve profitability, cash flow and credit metrics, with profit margins negatively impacted by inventory management initiatives and continued investment in future growth, particularly in key areas such as international and direct-to-consumer,” he wrote.

“The company’s operating results in the first half of 2018 are largely in line with our expectations, while positive free cash flow has led to increased cash and a reduction in debt year-over-year.”

Baird analysts instead look at the “softer Q3 guide,” with revenue expected to be in line to slightly down year-over-year and adjusted gross margin down about 50 basis points.

The FactSet consensus is for revenue of $1.44 billion, up from $1.41 billion last year.

But that hasn’t dimmed their optimism.

“We remain confident that Under Armour is on track for the year and that the multi-year recovery remains underway,” wrote analysts led by Jonathan Komp. “We still expect more positive sentiment to develop in the second half especially into the December 12 Baltimore investor day when Under Armour will lay our longer-term sales/margin targets.”

Baird rates Under Armour stock outperform with a $27 price target.

Under Armour shares are up 40% for the year so far while the S&P 500 index SPX, -1.63% has gained 5.3% for the period.

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