It has been about a month since the last earnings report for Under Armour (UAA). Shares have added about 1.4% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Under Armour due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Under Armour Q4 Earnings & Sales Beat Estimates, Up Y/Y
Under Armour, Inc. reported solid fourth-quarter 2018 results, with both top and bottom lines rising year over year and cruising ahead of the Zacks Consensus Estimate. In fact, this marked the company’s fifth and second consecutive quarters of top and bottom-line beat, respectively. The solid quarter and a decent outlook seem to have raised investors’ confidence.
Let’s Delve Deep
Under Armour’s adjusted earnings came in at 9 cents a share, which crushed the Zacks Consensus Estimate of 4 cents. The company reported break-even results in the year-ago quarter. The year-over-year upside can be attributed to enhanced revenues, improved gross margin and lower interest expenses.
Net revenues rose 1.5% (up 3% on a currency neutral basis) to nearly $1,390 million, which surpassed the Zacks Consensus Estimate of $1,376 million. Revenues largely gained from solid EMEA and Asia-Pacific sales. While sales from Direct-to-consumer (DTC) business remained flat at $577 million, wholesale business jumped 1% to $737 million on the back of growth in international regions.
Apparel sales rose 2% to $970.4 million, while net revenues in the Footwear and Accessories categories declined 4.5% to $235.2 million and 2.2% to $108.2 million, respectively. Meanwhile, Licensing revenues surged 39.4% year over year to $45.9 million, whereas the company’s Connected Fitness segment reported an increase of 9.1% to $30.3 million.
Net revenues from North America fell 5.8% (down 5.6% on a currency neutral basis) to $964.8 million. Remarkably, international business continued to witness sturdy growth, rising 24.5% (up 28.2% on a currency-neutral basis). Within international business, net revenues from EMEA and Asia-Pacific regions grew 31.7% and 35.2% to $178.2 million and $167.5 million, respectively, while Latin America revenues tumbled 15.1% to $49.2 million.
The company’s adjusted gross margin expanded 160 basis points (bps) to 45.1%, courtesy of improved regional and channel mix, lower product costs, reduced promotions, and a decline in air freight expenses. This was partly negated by foreign currency headwinds.
SG&A expenses fell 1% to $587 million, while, as a percentage of net revenues, the same contracted 110 bps to 42.3%.
Net interest expenses declined 21.5% to $7.3 million, and restructuring and impairment charges fell 34.1% to $48.2 million.
Other Financial Details
Under Armour ended the quarter with cash and cash equivalents of $557.4 million (up 78% year over year), total long-term debt of $728.8 million (down 21% year over year) and total shareholders' equity of $2,016.9 million. During 2018, the company generated $628.2 million as net cash from operating activities. The company incurred capital expenditures of $56 million and $154 million during the quarter and full year, respectively. The company expects to incur capital expenditures of nearly $210 million in 2019.
Under Armour is on track with its 2018 restructuring plan. In 2018, the company incurred pre-tax charges of $204 million, with $50 million reported in the fourth quarter.
Management is pleased with its quarterly outcome, which reflects good progress of Under Armour’s multi-year transformation plan. The company is focused on strengthening its brand through enhanced customer connections, effective innovations and strict go-to-market process. All said, the company reiterated its 2019 guidance, which was announced at its investor day in December 2018. Well, management continues to envision 2019 adjusted earnings per share of 31-33 cents.
Management envisions 2019 net revenues to increase 3-4%. Revenues from North America are likely to remain flat. The company projects international revenues to increase in low-double digits. Revenues from EMEA and Latin America regions are expected to be up at a high single-digit percentage rate and Asia-Pacific to be up at a high teen rate for the year.
Management expects wholesale revenue to be up at a low single-digit rate and sales from DTC business to be up at a mid-single digit rate. Both apparel and footwear are expected to increase at a low to mid single-digit rate, while accessories business is expected to be flat to down low single-digit.
Under Armour expects gross margin to improve 60-80 bps from the 2018 adjusted gross margin. The expansion is expected to be backed by favorable channel mix, stemming from reduced planned sales to off-price networks and increased proportion of direct-to-consumer sales. Also, reduced product expenses, owing to supply-chain efforts, are expected to boost gross margin. Operating income is anticipated to be around $210-$230 million. The company projects net interest and other expenses of $40 million.
For the first quarter, management expects revenue to be flat to down marginally. Management now projects mid-single-digit decline in revenues from the North America region but a low double-digit increase in the international region. Gross margin is projected to expand about 20-30 basis points with operating income expected to be about $5 million. Management expects first-quarter 2019 bottom line to be a loss of one cent.
How Have Estimates Been Moving Since Then?
Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -103.33% due to these changes.
Currently, Under Armour has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Under Armour has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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