Description

UAA                                                                          (3/29/17)                          Current Price:  $18 │ Price Target: $ 32

§  Stock has been taking a beating falling about 65% from its highs last year. If you can get past the fact that the stock trades at an estimated 40x earnings in 2017, and look ahead 2 years, I believe you will make 50% in a 2 year holding period.

§  Essentially the stock has been crushed post-earnings last three quarters (-5%, -13%, -26%), due to missing revenue estimates.

§  Part of the reason why this is occurred is because of UA misjudging the impact of Sports Authority liquidation. A big problem that was not foreseen was that most investors thought Sports Authority would re-org in bankruptcy  as opposed to liquidate. 

§  Part that I believe that the street is missing is that while Sports Authority liquidated, many sporting goods stores are closing doors. NKE mentioned that about 20 North American retailers are shutting down about 3,000 doors.

Investment Thesis

§  UA is a magnificent brand and I believe that the current stock price is below the brand value of the company (i.e. competitors would definitely love to buy it – not likely to happen). The excess inventory in the market due to the liquidation of sports authority, sports chalet and other closed doors are hurting the sales today. However, this will pass. The demand for the brand is there (as noticed by its 23% direct to consumer sales growth)

§  Worldwide there is a trend towards health and sports – a huge reason why is because of social media and the want/need to look great. This trend is huge and I estimate it to add 5%+ of tailwind worldwide (3.5% domestically and 6.5% internationally)

§  Disruptions in the supply chain are a short-term worry. The brand is very strong and UA is already finding ways to open new doors (Kohl’s, DSW).

§  The industry is massively consolidated. NKE is the only direct competitor and it is 10x bigger than UA. Adidas recent growth is due to its retro fashion sneakers and young brand Adidas Neo. Lululemon focuses on athleisure and ~75%+ is women. UA focuses on performance wear… and this is the thing. People wear workout shirts now… not just t-shirts.

o   This is why UA is in a great position. They have the best technology for sports, as cold-gear and heat-gear.

§  UA segments are: 70% apparel, 21% footwear, and 9% accessories VS. NKE: 28% apparel, 61% footwear and 10% other.

o   Due to this segment mix, UA has tremendous room to grow in the footwear category. I estimate footwear to grow at a 40% CAGR for the next two years

§  International represents 17% of revenues. It is currently growing at 60% CAGR. UA is rapidly increasing brand awareness, yet still under 50% in most markets.

§  Great athlete awareness: UA is represented by Stephen Curry, Tom Brady. Stephen Curry travels to China with Kevin Plank to promote the brand. China is expected to be the number one sports market in 2025.

§  Management is very competitive. Kevin Plank, CEO, started the company selling gear from the back of his truck. He loves to play the underdog character. The guy loves a challenge and he is on top on it.

Putting it all together, UA has the best sports gear product in the market, footwear growing at ~40%, and international growing at ~60%. However, since these two segments represent only ~25% of the business, it is not really helping much to hide the current domestic distribution channel woes. To compare, NKE is 53% international and they have about 20,000 points of distributions vs. UA’s 11,000 to sale their product.

Valuation

§  Originally, the street was looking at 2018, a $7.5B sales and 800m EBIT target,  and the stock was “fairly” valued at ~$50 per share. Using my 2018 estimates which include 13% lower revenue, 140 bps lower EBIT margin, and a multiple cut, I believe the stock has about a 70% upside from this price. ($6.6b sales, $614m EBIT and a 35x earnings multiple)

§  The 35x multiple represents about ~50% premium, derived by the fact that I expect UA to grow at 10 -15% multiple for the next 5 years. UA believes it will return to 20% growth. If it does, this thing will easily double. 

§  Margins, as footwear growth outperforms apparel growth, I expect UA to lose around 75-100 bps in the next two years. However, I expect some SG&A leverage. For guidance, 2014 EBIT was 11.5%, I expect margins in 2018 to be 9.3%. I think my margins may be too conservative. 

Key Risk

§  It is unlikely that the bottom is in

§  NKE is reporting bad US comps

§  LULU reported bad first quarter

§  Margins will continue/likely be hit

§  FBR thinks there is a price war. (I disagree, there is simply excess inventory)

Note: There are two trading stocks UA and UAA. There is a recent post regarding which shares may be better. Heads up with borrowing rates if you want to arb the spread. 

Catalyst

Earnings

GS Warriors winning NBA finals