We plan to reduce our fair value estimate for the narrow-moat firm.
We believe the natural questions investors should ask regarding Under Armour
's weaker-than-expected second-half 2017 outlook and restructuring plans are: How healthy is the Under Armour brand in a rapidly changing consumer environment, and what are realistic longer-term growth and margin expectations?
R.J. Hottovy, CFA, is a consumer strategist for Morningstar.
On the brand front, we still see long-term potential. Under Armour's North America segment remains in a down cycle--revenue was flat during the quarter--with the industry shift to fashion-athletic apparel versus performance, consumers' shift to digital channels, and the firm's own merchandising and supply chain issues weighing on results. Under Armour is not alone in its struggles, with competitors like VF, lululemon, and Columbia announcing facility/lease, contract termination, severance, inventory, and intangible asset impairment restructuring charges like the $110 million-$130 million the company expects to incur this year. Nevertheless, we still find two reasons narrow-moat Under Armour can return to double-digit growth in 2018 and beyond: The brand is resonating overseas (57% revenue growth in the quarter), and there is a halo effect from licensing deals with Major League Baseball and higher-profile athletes, professional teams, and universities.
We plan to reduce our fair value estimate to $24 per share from $28 as we factor in updated guidance (9%-11% revenue growth to $5.3 billion-$5.4 billion and ex-restructuring operating profit of $320 million, or operating margins of 5.4%), a modest reduction in our longer-term revenue growth assumptions (but still averaging low-double-digit growth beyond 2018), and the margin impact of category management, go-to-market, supply chain, and technology investments (which will likely keep post-2017 margins in the high single digits for a few years before returning to the low double digits). While fundamentals are likely to be choppy the next few quarters, we view the shares as undervalued from a long-term perspective.
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