Under Armour reported revenue growth of 91% over the same period last year.
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Following strong second-quarter earnings, Under Armour continues to impress—so much so that J.P. Morgan analyst Matthew Boss is upgrading the stock to Overweight from Neutral and increasing his price target to $30 from $25 by December 2022.
The sports and apparel company is showing signs of a turnaround after it agreed to pay a $9 million fine to the Securities and Exchange Commission earlier this year to settle claims that it used misleading accounting practices in 2015 and 2016 without admitting or denying wrongdoing. The stock is up 40% year to date.
In the most recent quarter, Under Armour (ticker: UAA) reported revenue growth of 91% over the same period last year. However, that wasn’t the comparison that investors were looking for. Instead, Boss notes that Under Armour ended the first half of 2021 with 11.8% more revenue than in the first half of 2019. On top of that, the athleticwear company was able to expand gross margins by 550 basis points over the same period of time. (A basis point is 1/100th of a percentage point.)
Boss acknowledges that Under Armour has been a beneficiary of strong organic growth in the global sportswear market, which grew at a compounded annual growth rate of 6% between 2015 and 2019. He expects Under Armour to continue to benefit from growth in the sector, projecting that the industry will expand at an annualized rate of 8% between 2021 and 2025.
Internally, Under Armour management continued to emphasize innovation and faster go-to-market strategies, which Boss argues will increase the company’s pricing power and full-price sell-through.
Indeed, there are already signs that the plans for operational improvements are materializing. Most notably, management has been able to reduce inventory by 26% compared with last year. And as Under Armour and sportswear rival Nike (NKE) follow through with plans to shift away from undifferentiated wholesale toward a direct-to-consumer model, Boss expects sportswear companies to be able to further maximize full-price selling.
Boss’s December 2022 $30 price target is based on a 15 times estimated Ebitda, or earnings before interest, taxes, depreciation, and amortization, for 2023. Supply-chain constraints and an increase in the promotional spending necessary to drive top-line growth pose risks to the price target.
Under Armour stock is up 0.5%, at $23.93, in recent trading, while the S&P 500 is up 0.3% and the Dow Jones Industrial Average is up 0.4%.
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