Under Armour Earnings: New CEO Enthusiasm Tempered by Disappointing Fiscal 2024 Outlook

Under Armour UA wrapped its (March-ended) fiscal 2023 with mixed fourth-quarter results that were close to our expectations. However, its shares fell a mid-single-digit percentage on the report due to a disappointing fiscal 2024 outlook for flat to slightly up sales and EPS of $0.47-$0.51 (our pre-report estimates were 4% sales growth and $0.63 in EPS). The firm guided to a weak start to the fiscal year due to the high inventories (up 44% at year-end) that will necessitate discounting. We expect to reduce our fiscal 2024 estimates on this outlook but do not expect to make any material change to our $15.50 per share fair value estimate. While sales growth and margin improvement under new CEO Stephanie Linnartz may not be apparent until fiscal 2025, we view Under Armour, trading at a low-double-digit P/E on trailing earnings, as very undervalued. We rate it as a no-moat firm but also believe it has competitive strengths, including its position as a premium athletic brand. In addition, its financial position remains solid, as it closed fiscal 2023 with more cash ($712 million) than long-term debt ($675 million) despite a difficult year.

Under Armour’s 7.5% fourth-quarter sales growth eclipsed our forecast by 2 percentage points. While its 2.5% operating margin matched our estimate, its gross margin was only 43.4%, well short of our 45% forecast and down 310 basis points from the previous year. The biggest factors in the decline were markdowns in its own channels and sales through discount stores. Although these issues are likely to persist into early 2024, we anticipate improvement as the year progresses as older inventory is sold and recent declines in input costs provide benefits. In the long run, we think Under Armour needs to improve control over its inventories and distribution to protect its brand and its margins. We believe the firm can improve its operating margins to 9% over the next decade, up from 5% in fiscal 2023.