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Jul 26, 2021
[4 min Read]
Ticker Symbol: $UAA
Current Price: $20.23
52 Week High: $26.45
52 Week Low: $9.63
Market Cap: 9.74 Billion
P/E Ratio: 80.37
Strategy: Call options
My Position: 25 calls at the 22 strike 227 calls at the 30 strike -Both expiring Aug 6, 2021
Entry: 22 strike calls entry at 0.60
30 strike calls entry at 0.09
This is a high conviction trade. Posting to share the research that I have found and to get some discussion going around $UAA. Would appreciate some input here, poke holes and share your thoughts!
I will keep it short and sweet, we all know Under Armour $UAA is in the top 3 list of athletic brands in the world. In late 2020, actually surpassing Adidas and becoming the second largest athletic brand in the world after Nike.
“Baltimore-based Under Armour had U.S. apparel and footwear sales of $1.2 billion through the end of August, edging ahead of Adidas with $1.1 billion total U.S. sales, according to a Sterne Agee report Friday citing sales figures from SportScanInfo. Under Armour sales have jumped 20 percent this year, while Adidas combined sales have plummeted 23 percent.”
Under Armour's original business model was a ‘quality over quantity approach' selling large amounts of inventory to discounted retailers, cutting their margins short. $UAA was not doing too well in the 2017-2019 span, gross margins lowered down to the 45% to 46% range. Under Armour used 2020 to their advantage and began the reconstruction of the company, “the company devised a multi-pronged approach that includes broadening its appeal in popular categories like running, relaunching an improved North American digital channel, implementing supply constraints to better align distribution with demand, and a $550 million restructuring program”
Although, sales growth did not see much change during the 2020 Covid pandemic for obvious reasons, gross margins returned to 49% which was a sign that the comeback plan was working. Now fast forward to their previous earnings on May 4, 2021, it was now extremely obvious that the Under Armour turnaround was finally moving. With an EPS of $0.16 and revenue of $1.26 billion compared to the $0.04 and $1.12 billion expectations.
On May 4, 2021 Under Armour saw an increase in their North America sales by 32%, their ecommerce channel also excelled generating “Nike-like growth” of 69%... and to top it all off, margins increased to 50%. “On a two-year stack, that is skipping over 2020, we're running a better, higher quality and more profitable business,” CEO Patrik Frisk said during the Q1 earnings call in May.
“The retailer now expects full-year sales to rise by a high-teen percentage rate, compared with a previous outlook of a high-single-digit increase”- CNBC
Consensus…BUY AND HOLD! Bullish
UAA analyst ratings: 14 HOLD, 12 BUY, 2 STRONG BUY, 1 SELL PT: $24.44 Upside: 20.83%
Some worries regarding the UAA business model was the lack of presence in China. But Under Armour has become a very well positioned company by making huge moves for themselves by reconstructing operations to be more China-centric and have a higher expected growth rate in the region..$UAA continues to build stores in China and management expresses their excitement about the digital process there. $UAA currently has 10% of revenue from China and it is expected to grow significantly throughout the years.
Another worry behind Under Armour was the overhang in stock due to poor inventory management. Under Armour has begun the solution to this problem by implementing a system that seeks to limit inventory by matching orders with sales. Another huge move that will greatly impact their inventory issue is the separation between Under Armour items and discounted retailers. This has allowed the average sell price of UAA shoes to outperform and beat Nike shoes according to an article by Market Watch. We will see large margin expansion as $UAA sees the effects of their exit from 2,000-3,000 discounted retail stores in 2021 and 10,000 stores by 2022.
Competitors in the sector-
Nike: Q4 2021 Earnings- Expected: $0.51 Actual: $0.93
Skechers: Q2 2021 Earnings- Expected: $0.49 Actual: $0.88
Crocs: Q2 2021 earnings- Expected: $1.52 Actual: $2.23
Retail sector is obviously doing fantastic with some hitting record breaking revenue. One of those being Skechers, reporting record breaking numbers of expected 0.50 and actual 0.88 and sales of 1.66 billion. With these types of numbers, $UAA is expected to follow suit with record breaking revenue beginning the turn around of the stock price as it's been in a long consolidation period since Feb 2021.
Back to school shopping is also projected to hit ATH's in 2021 as kids are finally able to go back to school. $UAA is a company that will greatly profit from this.
In my eyes and according to the price action and market cap, Under Armour is extremely, vastly undervalued. Market cap at less than 10 billion while its biggest competitor (Nike) has a market cap valued at 258 Billion. As mentioned, $UAA is the second largest athletic brand in the world and it is currently being valued at 1/25 of Nike.. either Nike is extremely overvalued or Under Armour is extremely undervalued. A fair valuation should be anywhere between a 14 billion and 25 billion dollar market cap for $UAA. With this type of market value, it is obvious that we are still early and there's a lot of upside to look forward to!
Under Armour has lots going for it, and not to mention that they became the first athletic company in history to create spacesuits and for them to actually be used in space via their partnership with Virgin Galactic $SPCE. I see UAA capitalizing off this opportunity in the space sector and perhaps creating more partnerships, strengthening their balance sheet even more.
I expect Under Armour to provide record breaking earnings on Aug 3, 2021.. With great guidance as well.