Cowen Incrementally Cautious on Under Armour (UA)

Cowen analyst, John Kernan published a company update on Under Armour, Inc. (NYSE: UA) and noted that the company's share price growth has been through multiple expansion, capital spending must maintain at high levels relative to peers and the company is in danger of unplanned markdowns due to the weather. Without downgrading or reducing estimates the analyst is conveying a greater sense of concern in the story. The firm actually maintained an Outperform rating but lowered its price target to $110 from $120.

UA is burning through cash as it funds its global expansion through capacity investments, international store growth, IT development and a headquarters expansion in Baltimore and overseas. UA's capex is rising to 8-10% of sales through FY18 from a prior five-year average of 3.5%. This new investment rate is at a substantial premium to its peer group rate average of 4%. UA's capex is allocating 1) 3-3.5% for maintenance; 2) 4-5% for capacity expansion; and 3) 1-1.5% to new revenue drivers such as DTC expansion.

With 62% of its TTM revenues derived from N. American wholesale, UA may experience margin pressure from elevated industry inventory levels which, as DKS's management commented on 11/17, implies unplanned markdowns. Numerous retailers reported surplus inventory positions from Q3, primarily in cold-weather apparel categories. Sales vs. inventory spread throughout the sector is negative for most in the recently reported quarter.

UA's planned Holiday promotions will be similar to last year but there could be unplanned promos to clear excess apparel inventory, particularly at DKS. They are forecasting 27% sales growth, 90 bps of gross margin decline and 58 bps of y/y EBIT margin erosion in Q4. In FY16 they are forecasting modest gross margin improvement, 2H weighted, and 25% sales growth, but stepped up investment spending is driving EBIT margin contraction of 18 bps to 10.3%.

For an analyst ratings summary and ratings history on Under Armour, Inc. click here. For more ratings news on Under Armour, Inc. click here.

Shares of Under Armour, Inc. closed at $92.08 yesterday.

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