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Under Armour (UAA) Up 47% YTD: What's Behind the Rally?

Zacks Equity Research logoZacks Equity Research 8/21/2018 Zacks Equity Research

Shares of Under Armour, Inc. UAA have outperformed the industry year to date. Evidently, the stock surged roughly 47%, significantly outperforming the Zacks Textile-Apparel industry, which grew 23.1%. Also, this Zacks Rank #3 (Hold) stock has comfortably outpaced the broader Consumer Discretionary sector's growth of just 1.1% year to date.

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Under Armour’s continuous focus on brand development, and expansion of DTC and technology-based fitness businesses bode well. Furthermore, apart from rolling out e-commerce platforms, the company continues to look for strategic opportunities to expand its footprint. Let us delve deeper into the factors that are propelling the stock’s performance.

Focus on Digital Fitness Business

With increasing consciousness about fitness among people, the company has been making several strides in this space. The acquisitions of MapMyFitness, Endomondo, and MyFitnessPal are in line with the company’s strategy of expanding its reach in the fitness space. The Baltimore-based company also unveiled its state-of-the-art line of Connected Fitness products, comprising UA HealthBox, UA SpeedForm Gemini 2 Record Equipped and two models of wireless headphones. Apart from these, the sale of UA HOVR, which was launched in February 2018, surpassed expectations. The HOVR platform launched two running styles, namely UA HOVR Sonic and UA HOVR Phantom. Management is banking on three platforms — HOVR, Charge and Micro G — to boost growth.

Expanding Global Footprint

Under Armour continues to seek opportunities for increasing its global footprint and gain market share from its rivals such as Nike NKE and Adidas ADDYY. Though the company generates major portion of its revenues from the North America region, it intends to expand business operations to other parts of the world to mitigate the risks stemming from concentration in one geographic region. In the process, the company opened its factory and brand stores in Canada and China as well as given franchise licenses in many countries over the years. Moreover, the company is expanding its DTC business in the United Kingdom, Germany and the Netherlands. Further, it rolled out e-commerce platforms in countries like Mexico, Australia, New Zealand and Chile.

Wrapping Up

Despite the above-mentioned upsides, Under Armour has been grappling with soft gross margins for a while now. Going forward, management expects adjusted gross margin to be down approximately 50 basis points in the third quarter. We note that the company witnessed high SG&A and interest expenses in the last reported quarter. Management now projects SG&A expenses to increase at a mid-teen rate in the third quarter. Further, it anticipates interest and other expenses to be $45 million in 2018 compared with $38.2 million last year. Analyst believe that this may weigh upon the company’s bottom line to some extent.

Nevertheless, we are optimistic that Under Armour’s growth plans will help offset the above-mentioned headwinds and keep the company going.

Looking for a More Promising Retail Stock? Check This

Columbia Sportswear Company COLM has a long-term earnings growth rate of 10.84% and sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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