The trifecta of headwinds that plagued Under Armour Inc. (NYSE:UAA) last year (overexposure to sporting goods, overexposure to NA, and overexposure to performance apparel) has not abated, in Canaccord's opinion. While Under Armour is working to diversify its channel mix as evidenced by its recent entry into KSS (and forthcoming entry into DSW and Famous Footwear later this year), the firm's checks suggest the apparel segmentation efforts have fallen short of expectations. In addition, Canaccord is concerned about the lackluster trends in footwear (and Curry) as it is a key element to the growth story. Specifically, the firm believes the combination of a lack of newness/differentiation in the Curry 3 coupled with too many releases too soon at a higher price point ($140) resulted in tepid Q1 sales. The latest Curry 3Zero release at $120 appears to be doing modestly better. Canaccord highly regard the brand and its long-term growth prospects; however, the product and geographic diversification occurring now will take time to yield results. As such, the firm remains cautious on Under Armour heading into its 1Q17 report on Thursday, April 27 BMO.
For Q1, Canaccord is projecting EPS of -4c vs. -3c consensus on net revenue growth of +5.3%, slightly below consensus of +5.9%. By category, the firm is projecting +2% growth in apparel as the category continues to suffer from sporting goods bankruptcies, a limited casual lifestyle assortment, and heavy promotional activity by competitors like Nike. On this last point, Canaccord has learned that Nike has relaxed its MAP (minimum advertised price) policy guardrails on apparel, thus allowing retailers to offer 25% off apparel throughout the year vs. only during limited times previously. This is a sign that Nike is taking an aggressive stance toward Under Armour while it is weakened and/or this is Nike's way of attempting to claw back lost market share at the expense of gross margin – neither of which is good for Under Armour. As for footwear, competition is fierce as Adidas is not showing signs of slowing, but at least the market is not abnormally promotional. The firm is projecting revenue growth of +13% in footwear, implying a sequential deceleration of ~54ppts on a two-year basis due to soft Curry sales. With higher markdowns anticipated, Canaccord projects GM will be down 108bps and inventory will remain elevated through Q3 before normalizing in Q4.
With the channel expansion efforts fully underway, Canaccord do not anticipates a change to the company's full-year outlook as incremental sell-in should help mitigate the lost sales from TSA and other smaller regional sporting goods retailers. That said, the firm do believes the company will place a greater proportion of the full-year sales growth weighting on 2H17. Canaccord thus is reducing its Q2 sales growth/EPS estimates from 13.7%/-4c to 7.1%/-9c and commensurately increasing Canaccord's Q4 estimates to 20.6% sales growth and 29c in EPS with no change to its full year 41c EPS estimate. The firm's $20 PT is based on a blend of 35x 2018E EPS, 18x EV/EBITDA, and DCF.