UBS is trimming price target to $21 from $23 based on cautious outlook for UAA’s 2Q update. Negative industry reads lately: 1) DKS expanded its Second Skin private label compression apparel brand (a direct competitor to UAA); 2) Academy announced 100 layoffs; 3) HIBB (where UA is 16% of sales) pre-released -10% SSS in 2Q. While UAA has historically had levers to patch over NT revenue shortcomings (like fill-in at big new channels like KSS), ongoing heavy industry promos create 2Q GM risk. UBS is maintaining 2QE EPS of -$0.07, (Cons: $0.06) on Revs: $1.077B (Street also $1.07B), and GM: -180bp YOY (Street: -160bp). We see downside GM risk.
UAA’s 2H guidance assumed an improving US promotional environment and UBS thinks the category remains much more promotional than UAA anticipated: 1) Last week, DKS launched price matching program; 2) Nike pulled its US MAP (price control) program last year and is running an early 20% off BTS sale now thru 8/1; 3) FL has continued to run 20-25% off flash sales lately. Importantly, UBS thinks the reality is that some of new distribution has been more cannibalistic/harmful to full-price selling than UAA expected (e.g. KSS is a likely cause of recent HIBB weakness, or why DKS is pushing harder to stabilize its compression category with private label). UBS is lowering 2H17E rev growth to +14% from +16%, resulting in 2017E EPS of $0.43 (previously $0.44).
The upside case requires a path back to ~mid-teens revenue growth (which Consensus expects by 4Q). In other words, UBS does not think UAA is poised to remain a 6% Op Margin business over the LT (6% is our 2017 est.). Rev compares get 10pp easier in 4Q vs 3Q (and stay easier through 1H18)—meaning the upside risk for a stock with heavily negative sentiment (30% short int) is if UAA can create buy-in that the rev deceleration cycle is ending. That said, UAA will likely have to guide 3Q revs below Cons (UBS expect 10%, Street: 12%)—implying revs need to accelerate to +19% in 4Q to hit annual guidance (a stretch). UBS thinks 2H revs will likely be reduced—pressuring the stock. UBS DCF-based $21 PT implies 37.5x our 2018E EPS of $0.55 (prev. $0.61).