Morningstar Equity Analyst David Swartz joins Yahoo Finance Live to discuss Under Armour earnings, CEO Stephanie Linnartz’s remarks during the sportswear company’s Q4 earnings call, rising costs, consumer demand, and the outlook for Under Armour.
- Well, Baltimore-based athletic apparel maker Under Armour reported a fourth-quarter earnings and revenue beat this morning. The company's new CEO, Stephanie Linnartz, expressed optimism on the call. Take a listen.
- I want this brand to win, to really win, by achieving the vision we all have for it. We are operating and executing with our eyes wide open. We know there is much work ahead of us and that we must move with urgency. Although fiscal '24 will be a year of building as we lay the groundwork aligned with our priorities, I am confident that we will achieve the growth and profitability that I know this brand is capable of over the long run.
- Well, despite that earnings beat, Under Armour's stock down more than 4% after the company issued guidance below the analyst consensus as rising costs weighed on demand. Under Armour also said revenue for 2024 is expected to be flat to up slightly versus 2023. Under Armour's new CEO, Stephanie Linnartz, noted in a statement that she's prioritizing amplifying global brand heat, elevated design and products, as well as Under Armour's positioning in the US to drive growth.
Well, joining us now to discuss is Morningstar Equity Analyst David Swartz. Thank you so much for joining us this morning, David. So you were on that earnings call. Did you hear anything that really moved the needle on your price target of $15.50?
DAVID SWARTZ: No, I don't think so. The outlook for next year, for fiscal year 2024, was quite disappointing. I was at $0.63 for the year, and Under Armour put out a forecast of $0.47 to $0.51, and that would be down from the last couple of years; earnings. So that was a bit of a disappointment. But the fourth quarter itself, the numbers were a little bit better than I expected. Revenue is slightly higher, and the EPS was a couple of cents higher.
So I thought the fourth quarter was decent. It wasn't great. The gross margin was mediocre, but that's to be expected given the market conditions. But I don't see anything that really changes the long-term outlook for Under Armour or changes my fair-value estimate, which is $15.50, which is clearly considerably higher than the current stock price.
- And so with that in mind, then, what is it going to take in terms of a growth story for Under Armour to get to that point?
DAVID SWARTZ: I think we need to see more consistent top-line growth. And that's been the problem for Under Armour going back probably seven years now. And it's not likely to happen in the next fiscal year either. So as you mentioned, Under Armour just brought a new CEO, Stephanie Linnartz. This was her first appearance on an earnings call, the first time that analysts like me ever really heard from her at all.
She laid out a vision on the call to improve, really, three major areas for Under Armour. That was product brand in North America. Under Armour has focused on those areas in the past, so that's nothing new, really. But maybe with a new CEO, there can be a renewed focus and some-- I think a better strategic direction.
Because if you look at the last few years, Under Armour has really changed its direction multiple times. There has not been a consistent strategy, and that has really hurt the company. And the company has lost market share to other sportswear companies. So I think there needs to be more of a focus on, really, the areas of strength for Under Armor and, really, less of this never-ending change in direction.
- And so to that point, then, how would you say perhaps Under Armour has any sort of competitive edge over, say, a Nike and Adidas?
DAVID SWARTZ: The competitive edge that Under Armour has is that it's very much focused on professional athletes and hardcore athletes. They don't do a lot of athleisure stuff like leggings and casual sweatshirts and casual T-shirts. A lot of it is really focused on athletes who are wearing Under Armour while performing sports. The target market for Under Armour is athletes in the high school and college range, and that's an area where I think they do have credibility.
I think they have an advantage there over some others, like Adidas, which is seen more of a lifestyle brand, and Nike, which is in everything. Nike is really broad-based. So I think that Under Armor's advantage is it's focus on real athletics. But there's been a lack of focus on that, too, in recent years because Under Armour has terminated a number of sponsorships of sports teams and colleges. And so you really wonder if they're sending the right message sometimes.
- And I do want to ask you about something else that came up, which was the persistent inventory issues, which means some of these promotional pricing is going to have to continue for longer. Why do you think Under Armour hasn't worked those kinks out yet? Because a lot of other companies seem to have a better management of their inventory than Under Armour.
DAVID SWARTZ: Yeah, the market has been difficult for a lot of companies, so I would give Under Armour a bit of a pass on that. A lot of companies did struggle to get their inventories under control last year, including Nike and Adidas. Adidas has been doing far worse than Under Armour recently, so it's been a very difficult market for a lot of companies in this industry. Under Armour, though, it just simply hasn't had the top-line growth. And so that's made it difficult for them to maintain to control the inventories.
The inventories came in too high into the holiday season, then there were too high coming into calendar 2023. And that required a lot of discounting. But again, Under Armour was not the only one. And so we saw elevated inventories and discounting, really, across the industry. But unfortunately, Under Armour has not been able to overcome that to the degree that some others have.
- Well, we'll take a look at that upside that could still be ahead in this turnaround story here for Under Armour. A big Thank you to David Wartz, Morningstar equity analyst. Thank you for joining us this morning.