Under Armour Inc Slumps After Cutting Outlook, Analysts Unshaken

Under Armour Inc Slumps After Cutting Outlook, Analysts Unshaken

Under Armour cut its guidance for this year on the back of Sports Authority’s pending liquidation. The athletic apparel maker said the retail chain’s closure will negatively impact its sales this year. Under Armour reported in a regulatory filing that it expects an impairment charge amounting to about $23 million due to Sports Authority’s closing.

The private retailer announced that it was filing for bankruptcy protection in March, and later a court approved a liquidation over a sale or restructuring. Sports Authority plans to begin discounting items through the end of August and then auction off all its store leases.

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Under Armour cuts guidance

Under Armour now expects sales to amount to about $4.93 billion for the full year, compared to its previous guidance of approximately $5 billion. Consensus estimates had suggested $5.02 billion in sales for the full year. Goldman Sachs analysts, who have a Neutral rating on the athletic apparel brand’s stock, said the new outlook suggests $120 million in incremental lost sales from Sports Authority. However, they expect one-third of those sales to be recaptured at other retailers, including Dick’s, Under Armour outlet stores, and UA.com, citing management’s updated guidance.

They trimmed their price target from $49 to $45 per share based on the lower sales and earnings estimates.

Under Armour struggling in competition

Morgan Stanley analyst Jay Sole and team, who downgraded Nike today, have an Underweight rating on Under Armour, and they don’t believe this will be the last of the bad news. They’re concerned that the reduction in sales guidance means that the athletic apparel brand hasn’t found a “reasonable alternate channel” for much of the product it previously sold through Sports Authority. They note that after the initial bankruptcy announcement in March, Under Armour reiterated its fiscal 2016 guidance, so this week’s reduction means that the company has been unable to find a replacement outlet for its product.

Further, they warn that competition in U.S. athletic apparel is becoming even fiercer as they believe demand has slowed and inventory hit its highest level in years. They said if this is not the case, the company could have shipped the inventory it was planning to sell at Sports Authority to its off-price channel or other destinations. Further, they believe deep discounts will be needed to recover only $45 million in sales, and they expect the gross margin on these sales to be 800 basis points lower than the company’s average.

Not all analysts bearish on Under Armour

Sterne Agee CRT analyst Sam Poser and team have a Buy rating and $60 per share price target on the athletic brand’s stock. Despite the reduced outlook, they say the company’s long-term story is intact, although they note that a “hiccup on a stock trading at 41X our 2017 estimates is not a good thing.” They add though that their checks and available data suggest that the Sports Authority bankruptcy is only a short-term problem as the company has had several big product wins recently.

Sales of Stephen Curry-branded basketball footwear and golf star Jordan Spieth products have both positively impacted sales, and the Summer Olympics is also expected to give Under Armour a boost, which is key because this will be the first time all of North America can watch the event on live TV since 1996.

Canaccord Genuity analyst Camilo Lyon also has a Buy rating on Under Armour and echoed the positive comments, emphasizing that this is just a temporary problem. He expects inventory to remain unaffected and the inventory-sales spread to dramatically improve from the 1,400 basis point spread in the first quarter to about 500 basis points or less.

Under Armour shares plunged by as much as 4.8% to $35.92 in afternoon trading.

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