Under Armour Slammed by COVID-19, Recovery Looks Slow
We expect to lower our fair value estimate for the no-moat company after a devastating first quarter.
No-moat Under Armour’s (UA) results for the first quarter of 2020 were even worse than we had feared, and it appears there is little hope of a quick recovery. While Under Armour’s first-quarter sales decline of 23% was just below our forecast of a 22% drop, its adjusted operating loss of $121.7 million was well short of our expectation of a $94.5 million loss. Surprisingly, despite the lower sales, the firm’s selling, general, and administrative expenses jumped 8% on higher marketing and legal costs. We anticipate a decrease in operating expenses in the second quarter as the company has recently furloughed employees, slashed marketing, and taken other steps to conserve cash. Unfortunately, while Under Armour provided no specific guidance, it revealed that second-quarter sales may decline as much as 50%-60%, well below our prior forecast of a 36% decrease. The company is suffering supply disruptions and most of its worldwide stores and those of its wholesale partners remain closed. While its stores in China and South Korea are now open, the company reported sluggish customer traffic. Thus, we expect to reduce our $12.40 fair value estimate on Under Armour per share by a high-single-digit percentage. However, we view shares as attractive for investors willing to look past the near-term turmoil as we do not expect the firm to become distressed.
We believe Under Armour has enough liquidity to get through the crisis. The firm closed the first quarter with $959 million in cash and has since borrowed an additional $100 million under its revolving credit facility, leaving $550 million in remaining borrowing capacity. There was a risk that the firm could violate its debt covenants, given the likelihood of negative EBITDA in 2020. Under Armour, though, reports that it is in the final stages of amending these covenants, so we do not view this as near-term risk.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
David Swartz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.