Hail Mary (UAA)

Under Armour (UAA, UA) is set to report Q4 results tomorrow before the market opens with a conference call to follow at 8:30am ET. UAA is expected to report results at 7:15am. Last quarter the co provided its Q3 results at 7am and then provided prepared conference call remarks on its website shortly after the earnings release. Current Capital IQ consensus stands at EPS of $0.25 on revenues of $1.409 bln. 

Guidance

• Expects Q4 revenues to grow ~20%. (Approx $1.404 bln, Capital IQ consensus $1.409 bln) 
• Gross margin is expected to be relatively flat versus prior year.
• Expect operating income in the range of $186-191 million, representing growth of 5-8% y/y.
• Reaffirmed guidance for FY16, seeing FY16 revs of $4.93 mln vs. $4.94 bln Capital IQ Consensus Estimate. 
• Reaffirmed 2016 operating income of $440 million to $445 million.
• On track to achieve 2018 revenue goal of $7.5 billion and expect to grow full year revenues consistently in the low-20s in both 2017 and 2018.
• Lowered its 3-year CAGR for EBIT to the mid-teens from 23%.
• Expect annual operating income growth in the mid-teens in each of the next two years; Focus is on investing to 'get big fast'.
• North America Apparel growth is slowing across the industry. While expect to continue to significantly outpace the apparel industry, the growth rate going forward will be less than expected from Investor Day in 2015.
• Will invest more heavily in areas that can grow faster such as footwear, direct-to-consumer and international as well as more aggressively enter Sport Fashion, like UAS, and the much broader sports lifestyle category.

Key Issues

• Border Tax- UAA would be seen as a big loser if a border tax was enacted. It currently has approx 85% of its sales in the United States. It produces approx 65% of its products overseas in China, Jordan, Vietnam and Indonesia. 
• Valuation- UAA is trading at approx 42x Forward P/E compared to 20x for Nike (NKE). 

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$UA Earnings Preview

Under Armour (UA) reports Q2 results tomorrow July 26 followed by conference call at 8:30am ET.

Current consensus is for Q2 EPS of $0.02, operating income of ~$19 mln on revs +28% to $1.00 bln (guided for revenues in high 20s, operating income of ~$17-19 mln and flat gross margin). Since becoming a publicly traded company, UA has never missed earnings estimates.

Last quarter, Under Armour beat Q1 EPS estimate by $0.02, reported revs in-line, guided Q2 operating income / revenues in-line and slightly raised FY16 guidance / reaffirmed margin guidance.

Headed into the print: UA has held onto these recent gains and is back near pre-Q1 levels. 

Based on UA options, the current implied volatility is 14% higher than the historical volatility (over the past 30 days). UA Weekly Jul29 $42.5 straddle is currently pricing in a move of ~8% in either direction by weekly expiration (Friday).

Key metrics and areas of interest:

• Current Quarter: Following the decision of the bankruptcy court to approve the liquidation of The Sport Authority's business rather than a restructuring or sale, Under Armour determined to recognize a Q2 impairment charge of ~ $23 mln and updated its Q2 and FY16 outlook. The company reaffirmed Q2 revenue growth in the high 20s but revised operating income to $17-19 mln (prior $40-42 mln) as a result of the impairment.
• Guidance: The Sport Authority mid-quarter update included revised 2016 guidance for operating income to ~$440 -445 mln (prior +23-24% to $503-507 mln) on net revenues +24% to $4.925 bln (prior +26% to $5.0 bln). Updated outlook will be included in the earnings press release - estimates are tracking slightly ahead of the this prior outlook with operating income of +11% to ~$453 mln estimate and revenues +25% to $4.96 bln.

Techs:

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