Under Armour Stock, Gap and Crap, Here's Why

Key Points

• Under Armour had a solid fiscal Q3 2023 top and bottom lines beats.
• The Company raised fiscal full-year 2023 EPS guidance.
• The stock initially gapped but collapsed over (-10%) in the following days.
• Gross margins fell (-650 bps) YoY to 44.2% as inventories rose 50% to $1.2 billion in its fiscal Q3 2023 report.
• Under Armour's new CEO is coming over from Marriott International on Feb. 27, 2023.
• Shares trade at 20.7X forward earnings with a 12.35% short interest.

Investors may be shaking their heads over why the stock fell when earnings were strong as they raised their fiscal full-year 2023 EPS guidance. Sports apparel and footwear manufacturer Under Armour Inc. NYSE: UAA recorded solid fiscal 2023 earnings, but shares faded the premarket 8% gap and sold off over 8% the following day. Shares initially gapped up on impressive results but then reversed and sold down into negative territory.

This action is seen as a "Gap and Crap" reaction to an event.

The reaction was the opposite of Nike Inc. NYSE: NKE earnings blowout, triggering shares to a gap and continuing higher with follow-through buying. Under Armour fell under some of the same reasons as Lululemon Athletica Inc. NASDAQ: LULU when they sported higher revenues but compressed margins. It's usually a sign of weak pricing power as the retailer discounts its apparel deeply to clear out inventory. Consumers might catch on to this and be conditioned to wait for promotions rather than pay full price.

Five Key Reasons for the Gap and Crap

There are a few reasons for the selloff. First, the earnings and revenues beat were on previously lowered guidance. Secondly, the best upside and positive sentiment for the new permanent CEO was already priced into the stock going into earnings—a sell-the-news effect kicked in.

Under Armour gross margins fell 650 basis points, and the Company expects margins to continue to deteriorate for the full fiscal year near the high range of 375 to 425 bps. Lastly, inventories ballooned by 50% in the quarter. It translates to extensive discounting to pump up the numbers as consumers showed little demand. Margin compression generates higher sales but fewer profits.

When selling stuff cheaper, you should be cutting down on inventory. The same happened with Lululemon Athleta NASDAQ: LULU, showing a margin compression of 90 bps to 110 bps on higher revenues. Under Armour's inventory grew by 50% despite extended promotions. Additional reasons for the selloff could also include its falling sales in the core market of North America and its direct-to-consumer channel.

Earnings Beat But Metrics Show Weakness

On Feb. 8, 2023, Under Armour released its fiscal third-quarter 2023 results for the quarter that ended December 2022. The Company reported a diluted earnings-per-share (EPS) profit of $0.16, beating consensus analyst estimates of $0.09 by $0.07. Revenues grew 4.6% year-over-year (YOY) to $1.60 billion, beating analyst estimates of $1.55 billion.

Wholesale revenues grew 7% to $820 million. Direct-to-consumer (DTC) revenues fell (-1%) to $715 million, offset by a 7% increase in eCommerce sales. North American revenues fell (-2%) to $1 billion YoY. International revenues rose 14% to $527 million.

Gross margins fell 650 bps YoY to 44.2% due to higher promotions and FX. Inventory grew 50% to $1.2 billion. The Company closed the quarter with $850 million in cash and cash equivalents.

Under Armour interim CEO Colin Browne commented, "We are pleased to have delivered solid third-quarter results and remain on track to achieve our full-year operational and financial goals. I'm excited to partner with Stephanie Linnartz to further advance our strategic consumer and product refinements – leveraging Under Armour's strong brand to drive sustainable, profitable growth."

Raised Guidance Back Up from Lowered Guidance Last Quarter

Under Armour's prior quarter fiscal Q2 2023 lowered their EPS to $0.44 to $0.48, down from $0.47 to $0.53 original estimates versus $0.44 consensus analyst estimates. On its Q3 2023 earnings report, it raised fiscal full-year 2023 EPS guidance to $0.52 to $0.56 versus $0.46 consensus analyst estimates. Revenue is expected to grow in constant currency at a low single-digit percentage range. Gross margins are expected to fall from 375 bps to 425 bps.

New Leadership

Coming over from Marriott International Inc. NYSE: MAR, Stephanie Linnartz will take the helm as president, CEO, and board member of Under Armour, effective Feb. 27, 2023. She brings over 25 years of leadership roles specializing in branding, loyalty programs, and partnerships. She is also a board member of Home Depot Inc. NYSE: HD.

 

Weekly Cup and Handle Breakout

The weekly candlestick chart on UAA illustrates the cup and handle breakout. Shares formed the lip line at $10.87 before selling off to the low of $6.38 in September 2022. UAA staged a recovery bounce triggering the market structure low (MSL) breakout through $7.70. Shares managed to rise to retest the lip line at $10.87, completing the rounding bottom and the cup in December 2022. Shares pulled back off the lip line to $9.40.

It staged a rally back up to breakout through the lip line and formed the handle as shares climbed up to $13.05 heading into the earnings report. The gap and crap sent shares falling back to the lip line, where it formed a market structure high (MSH) trigger under $10.87. Pullback support levels are at $10.47, $9.40 handle low, $8.98, $8.13, and $7.70 weekly MSL trigger.