Under Armour Inc. got an early stock bump after better-than-expected first-quarter revenue, but dipped into negative territory during Tuesday trading with analysts expressing concern that inventory levels and margin pressure could hamper growth.
Under Armour UAA, +1.07%[1] reported sales[2] of $1.19 billion, up from $1.12 billion last year and ahead of the FactSet consensus of $1.12 billion. North American revenue was nearly flat, but international revenue was up 27%.
However, gross margin was down 120 basis points to 44.2%, impacted by “accelerated inventory management initiatives.” Despite these efforts, Wells Fargo analysts led by Tom Nikic note that inventory levels were still up 27% to $1.1 billion.
“[T]he plan to pull back on promotional activity and generate strong gross margin improvement (beginning in 2H18) could prove difficult to achieve,” analysts wrote in a note.
See: Nike executive departures throw growth plan into jeopardy[3]
“Under Armour generated double-digit operating margins as recently as 2014 (11.5%), but a combination of heavy investment and slowing top-line trends have weighed heavily on profitability,” Wells Fargo said.
Other headwinds that Wells Fargo highlighted are a $700 million investment in the Connected Fitness initiative and growth in footwear and the international business. Even with growth in footwear, analysts note that Nike Inc.’s NKE, -0.72%[4] business is $21 billion, Adidas AG’s ADS, -0.29%[5] is about $12 billion compared with about $1 billion for Under Armour.
Wells Fargo rates Under Armour underperform with a $13 price target.
“The inventory levels continue to appear out of control, and the increase in receivables appears to highlight large shipments at the end of the quarter,” wrote Susquehanna Financial Group analysts led by Sam Poser.
“The combination of high receivables and elevated inventory levels looks like a ticking time bomb to us.”
Susquehanna rates Under Armour shares negative.
Also: Vista Outdoor aims to exit several brands, including firearms[6]
Instinet said there are two sides to the earnings story, higher revenue on one hand and margin issues on the other. “And to that end, we expect conversations to continue shifting toward margin opportunity as the company looks inward at improving the health of the business, rather than simply expanding it,” analysts led by Simeon Siegel wrote in a note.
Under Armour CEO Kevin Plank focused on the future during his earnings call remarks, maintaining an upbeat view...