Under Armour’s margins and profitability
As discussed, Under Armour (UAA) is scheduled to report results for the second quarter of 2018 on July 26. Wall Street has predicted a net loss of eight cents per share as compared to a net loss of six cents per share in the same quarter last year. The company achieved break-even levels during the first quarter with EPS (or earnings per share) of $0.00. It outperformed Wall Street expectations of a five-cent net loss. Falling sales and inventory pressures have impacted UAA’s profitability over the last several quarters. As a result, its earnings per share fell a whopping 58% during fiscal 2017.
A look at gross margin trends
Under Armour’s gross margin has deteriorated over the last 12 quarters. The adjusted gross margin was down 60 basis points during the first quarter of 2018, as 70 basis points of positive foreign exchange impact was washed away by 130 basis points of negative impact from the higher off-price sales mix driven by inventory management initiatives.
However, management expects gross margin to improve in fiscal 2018. Changes in channel mix towards DTC sales, lower product costs, and favorable foreign currency rates are projected to boost the gross margin by 50 basis points during the year. However, most of this improvement is likely to come in the back half of the year.
SG&A expenses projected to decline in fiscal 2018
Ongoing investment in the DTC, footwear, and international businesses has resulted in a surge in Under Armour’s SG&A expenses. SG&A expenses increased at an average rate of 25% over the last five years. As a result, the company has a higher expense rate than peers.
UAA’s SG&A expense rate stood at 41.9% of sales in fiscal 2017. In comparison, Nike (NKE) and Lululemon Athletica (LULU) recorded SG&A rates of ~31% and 34%, respectively, during the last fiscal year.
The company is, however, working towards improving its cost structure. The management has projected a mid-single-digit growth rate in SG&A expenses during fiscal 2018. For the second quarter, SG&A expenses are projected to increase at a low-double-digit rate.
ETF investors seeking to add exposure to UAA can consider the PowerShares S&P 500 High Beta Portfolio (SPHB), which invests 1.1% of its portfolio in the company.
Of the 32 analysts covering UAA, 53% recommend holding the stock.
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