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Under Armour's (UAA) Bull Run Likely to Continue: Here's Why

Zacks Equity Research

Under Armour, Inc. UAA emerged as an investor favorite, courtesy of sound fundamentals and growth efforts that reinforce its position. We note that shares of this Baltimore, MD-based company have gained approximately 35% compared with the industry’s growth of 15% in the past six months.

This Zacks Rank #1 (Strong Buy) stock has also comfortably outperformed the Consumer-Discretionary sector and the S&P 500 Index that advanced 16% and 14%, respectively, in the said time frame. Further, the stock is close to its 52-week high of $27.50. It is likely that Under Armour, with a long-term earnings growth rate of 27.1%, can attain new heights.

We expect the company to continue gaining from the focus on brand development as well as the expansion of direct-to-consumer (DTC) and technology-based fitness businesses. Further, it is progressing well with its multi-year transformation plan and has undertaken other growth strategies. All said, let’s delve deeper into the factors.

Factors Narrating Under Armour’s Growth Story

With rising health consciousness, sports apparel makers like Under Armour are entering the business of fitness gadgets and other tracking platforms to attract more customers. The acquisition of MapMyFitness, Endomondo and MyFitnessPal are in tune with the company’s strategy of expanding its reach in the fitness space. Also, management is impressed with the popularity of UA HOVR. Under Armour is banking on three platforms — HOVR, Charge and Micro G — to boost growth.

In addition, the company is focused on strengthening its brand through enhanced customer connections, innovations and strict go-to-market process. Apart from this, management has undertaken long-term plans to ensure business growth in the next five years. The company plans to introduce improved athletic products along with increased investment in DTC, international, women's and footwear businesses.

Notably, Under Armour has been making efforts to boost its DTC business through store expansion and enhancement of the e-commerce platform. In the first quarter of 2019, DTC business’ contribution was 27% of global revenues. Management expects this business to grow at a mid-single-digit rate in 2019.

Based on these strategies, the company expects the top line to increase in a low-double-digit rate in 2023. Further, earnings per share are expected to advance 40% on a five-year compounded annual growth rate basis.

Wrapping Up

Such efforts also helped the company to deliver better-than-expected first-quarter results. Encouraged by these factors, management raised its 2019 view.

Under Armour now expects 2019 earnings per share of 33-34 cents, whereas the prior projection was of 31-33 cents. This suggests a year-over-year increase from 27 cents reported in 2018. Management envisions net revenues to increase 3-4%. Under Armour anticipates gross margin to improve 70-90 bps. The expansion is expected to be backed by a 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 drive gross margin.

We expect all of the aforementioned factors to boost the company’s performance and help it remain in investors’ good books.

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