Under Armour Shares Gap Lower As Judge OK's Shareholder Lawsuit

Shares of Under Armour NYSE: UA gapped lower Wednesday after a judge in Baltimore, where the company is based, said shareholders could sue the company for concealing how revenue was reported in 2015 and 2016.

Although that’s not great news for the company, most of the stock’s movement is likely due to the slaughter in the broader market, as the S&P 500 gapped down 1.14%, led by weakness in big tech firms. Concerns about the fall in cryptocurrencies, which remove liquidity from global markets, is also a factor. 

Under Armour, whose logo seems to be ubiquitous on workout apparel and the growing category of “athletic leisure” clothing, has been consolidating below its May 5 high of $21.82. It rallied 7.15% that day, following the company’s first-quarter earnings report. 

The company reported earnings per share of $0.16, up from a loss of $0.34 per share in the year-earlier quarter. Revenue was $1.257 billion, up 35% from a year ago. Both U.S. and international sales drove the revenue increase. 

That revenue figure, in particular, marks a turnaround for Under Armour, whose sales began slowing in 2019, well before the pandemic. Earnings growth accelerated over the past two quarters, and topped analysts’ expectations in the first quarter.

The stock advanced 27.55% year-to-date and 160% over the past 12 months. However, over the past three months, Under Armour is up only 2.54%. 

Late last year, the stock struggled to rebound from the spring pullback. Shares began rallying in earnest in September, and are up 115% since then, despite retreating 7.68% this month.

Shares are trading between $18 and $19, their best levels since January 2020. 

Only Brief Periods Of Strong Rallies

However, other than a strong run-up in 2017 and 2018, as well as over the past year, the stock has never lived up to its “growth” hype, in terms of share price appreciation. 

Current broad-market wobbles aside, there may be reason for optimism about the stock. 

Often a new CEO can begin a turnaround at a company. Patrik Frisk was named to the top job in January 2020, succeeding founder Kevin Plank, who remains the firm’s majority shareholder, and as such, still has a voice at the firm. 

Frisk began slashing expenses, as well as improving internal processes and jump-starting marketing initiatives. 

When it reported first-quarter results, Under Armour boosted its full-year revenue guidance. 

In the earnings release, the company said it expects sales to grow at a “high teens percentage rate,” up from its previous guidance of sales growth in the high single digits. It noted, however, that "continued COVID uncertainty" may affect results. Companies have to add disclaimers like that these days, despite a fast pace of reopening. 

In fact, inflation, difficulties hiring workers and other factors may have an even greater impact on company operations and revenue than Covid-19 itself. 

Restructuring Leads To 2021 Loss?

The company announced a restructuring plan last year, and that will also be seen in this year’s results. Due to pre-tax charges which will ding the bottom line, the company expects a loss this year. 

“We expect to deliver an operating margin of approximately 2% for an adjusted operating margin of approximately 4.5% in 2021,” said chief financial officer Dave Bergman in the earnings conference call.

“All of this takes us to a diluted loss per share of approximately $0.02 to $0.04, or excluding restructuring impacts, about $0.28 to $0.30 of adjusted diluted earnings per share. To sum it up, we believe we have appropriately updated our outlook to reflect the improvements we see across the business,” Bergman added. 

The stock is currently not one to consider buying, although it’s one to watch. Not only is current market weakness a factor in buy decisions, but this stock still has to prove it can launch a sustained uptrend, accompanied by heavy trading volume as a sign of strong institutional support.