A Complete Reset For Under Armour (NYSE:UA)

Make no mistake, it has been a tough environment for retailers. You have soaring housing costs. Food is expensive. Gas is expensive. Credit card and other borrowing rates are so high. Student loans are being repaid once again, also biting into the consumer’s spending power. While consumer sentiment still remains higher than we would expect with all of this going on, there has been real pressure on many restaurant and retail stocks. Sure, there is a lot of variability within the space, with some notable winners, but many are under pressure.

One name that was once a Wall Street darling that has fallen onto hard times over the last year or so is Under Armour, Inc. (NYSE:UA, NYSE:UAA). After the just-reported fiscal Q4 earnings that came with the announcement of a restructuring plan, we think it is time to consider a speculative bet on a successful turnaround.

Who is Under Armour?

Under Armour is an American sportswear company that manufactures footwear and apparel. They make a lot of apparel that you see many who live an active lifestyle wear. They also have deals and sponsorships with many professional athletes. If you have ever owned any of the clothing, Under Armour is best known for its moisture-wicking apparel, which is designed to help athletes stay cool and dry during workouts. But they have hats, and hoodies, sneakers, and much more. While the company has experienced a palpable downtrend, and it has been forced to be extremely promotional to move merchandise, we think it is undergoing a major reset. Let us discuss.

Sales down in Under Armour’s Fiscal Q4 earnings report

Overall, in fiscal Q4 revenue was down 5% to $1.3 billion, and missed consensus slightly by $30 million. But sales revenues were down heavily in North America, and its wholesale business, while there was a bump up in sales internationally, was a lone bright spot here. While North American revenue dipped 10%, international sales grew 7% (up 6% adjusted for currency changes). This growth was driven by a strong performance in EMEA (Europe, Middle East, and Africa) with a 10% increase and Latin America surging 20%.

Overall direct-to-consumer revenue remained flat. However, there was a shift within the channel, with revenue from owned and operated stores rising 7% and online sales dropping 8%. Online sales still represents a significant portion (43%) of the direct-to-consumer business. Wholesale revenue, however, was down 7%. Much of the lower sales figure stemmed from the company still being promotional to move merchandise. That said, we saw strong reduction in inventory, and margins improved.

Inventory is down significantly while margins expanded

The company had to be promotional this fiscal year to move merchandise and reduce inventory. This weighed for several quarters with the aforementioned pressures in the macro environment on the consumer and the company. Inventory was down 19% to $958 million. Gross margin increased 170 basis points to 45.0% despite the promotional activity, and this was driven by supply chain benefits related to lower product and freight costs. Further, adjusted selling, general & administrative expenses were down 5%to $546 million as the company works to control costs. Factoring in other expenses, adjusted operating income was $54 million, while adjusted net income was $49 million, or $0.11 per share. This was a $0.03 beat versus expectations. Overall, a respectable quarter.

Why we think it’s time to speculate, a reset is underway

The promotional nature of the last few quarters to move inventory is coming to an end. The company also has a solid balance sheet in our opinion. Cash and equivalents were up nearly $150 million from a year ago to $858.7 million, while long-term debt, net of current maturities, is a manageable $594.9 million, an $80 million improvement from a year ago. The company is putting money to work here too, as the board has authorized the repurchase of up to $500 million of Under Armour’s outstanding Class C common stock, taking advantage of a low share price.

And in recognizing the issues with North American declines, the company announced a restructuring plan. This will cost up to $90 million, and will include severance packages to reduce the workforce, transformational activities, and improvements in facilities and software. However, because of this move, in the near term, the top and bottom line will be pressured.

Forward view

The market is not selling off Under Armour, Inc. stock on this report, which is excellent news. We take it as a buy signal, but it is speculative in that management must now execute. If they execute and rebuild the brand strength over the next year while shaving costs, and seeing better margins by being less promotional, we could see a gradual ramp up in performance. We expect the next few quarters to see earnings pressure, and the guide on Fiscal 2025 EPS was just $0.18-$0.2, a substantial decline from $0.54 that Fiscal 2024 saw.

But the market is not selling off on this otherwise dismal guide. Why? Because it is a complete reset. And we think that it is the start of the real comeback, and you can consider speculating in Under Armour, Inc. stock at about $6 per share.