Under Armour Inc (NYSE: UA, UAA) investors are looking for any signs of life from the company when it reports fourth-quarter earnings on Feb. 13. The company’s third-quarter earnings report was a disaster, and analysts doubt that recent positive trends in footwear sales will be enough to turn the tide.
In the third quarter, Under Armour missed consensus revenue targets and slashed its full-year earnings guidance by 50 percent. Under Armour was once known for its robust revenue growth, but weakness in the North American market actually pushed revenue growth into negative territory last quarter.
Analysts are expecting Under Armour to report a breakeven fourth quarter on revenue of $1.31 billion. Understandably, reporting no profit or earnings growth doesn’t inspire much confidence from Wall Street.
Bank of America analyst Robert Ohmes says Under Armour footwear sales were up 9.3 percent in the past four weeks. Average sales prices dropped 10.8 percent in the same period as Under Armour continues to clear inventory through lower-tier distribution channels.
Looking ahead to 2019, Bank of America projects only 40 cents per share of annual earnings power.
“Our price objective is at the low end of UAA’s historical price-earnings range of 25x to 75x to reflect near-term top-line challenges, particularly in North America,” Ohmes says.
In January, Macquarie Capital analyst Laurent Vasilescu said Under Armour’s pricing weakness will make it difficult for the company to hit margin targets in 2018. In fact, despite a consensus forecast of modest margin expansion in 2018, Macquarie is projecting a 1.1 percent decline in gross margins.
Yet even with deteriorating fundamental numbers and a 62.5 percent drop in share price in the past three years, the most dangerous part of Under Armour’s 2018 could be its precarious financial situation.
“UA may need at some point to do a capital raise if revenues, gross margins and [selling, general and administrative expenses] continue to deteriorate,” Vasilescu says. “This may prove challenging with Moody’s and S&P’s recent downgrades as well as the multi-class equity structure.”
If management could at least reassure shareholders that there is no imminent need for a dilutive capital raise, it could be a silver lining to another otherwise disappointing quarter.
Bank of America has…
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