Under Armour. More Trouble Ahead!

The first quarter for 2018 is gone and an earnings date has been announced for UA's on May 1. I have been reading their latest 10-K filing and trying to find a clue on where the Company is headed. My findings are nowhere near pleasant but I assure you I've given this my best case scenario on everything and even then the numbers don't look good.

Let me start with "Net Revenue", the Company has been showing signs of deceleration in that area. It had been expanding at an average rate of 21.2 % annually over the last 4 years but with the slowest of them being last year at only 3.2%. Being generous, I will give this area an estimated 10% increase to an expected $1,229M when compared to same quarter last year of $1.12B. I said I am being generous because not only the company has shown signs of deceleration when it comes to Net Revenue but it has actually decreased in the sales here in North America where it lost 5.1% during 2017 (the equivalent to almost $203 Million) as reported in their latest 10-K filing. On top of this and based on Yahoo Finance, the analysts are expecting a high estimate of $1.12B.

Second, I estimate the COGS (Cost Of Goods Sold) for the quarter will be somewhere around $651M and I came to this number based on the fact that on the same 10-K filing (page 41 and 42, note 3) the company refers to "Purchases and Obligations" as their open orders placed with manufacturers. The company also notes that these orders are generally placed 3 to 4 months in advance of expected future sales and that their open obligations are $1,094M. So, assuming the $1,094M represent the entire 4 months order I could've easily just report 75% of it as COGS ($820M) but I decided to go with $651M because that is in line with 53% of revenue. Again being generous to the company because in the last 8 quarters the average is 54.27% and the lowest was 52.28% (back in 2Q16).

Third, SG&A (Selling, General & Administrative) expenses could be around $522M and this because previously the company has reported this expense as 42.55% and 44.56% for 1Q15 and 1Q16 respectively (the percentages are with respects of revenue for that quarter). I want to mention here that reading through the 10-K I could not find indicators that this expense will increase significantly. However, we must consider that the bulk part of this expense is marketing and given the fact that the company showed negative growth in their "North American" segment I would not be surprised that this expense to be a little higher this quarter because of that. On top of this the company is growing internationally and this could also trigger higher expenditures that will affect the bottom line in the short term but help down the road.

My next estimate is the Restructuring and Impairment Charges. Historically the company has not reported anything under this area during the 1st. quarter of the year. Nonetheless we can find under "Recent Developments" of their 10-K filing (page 29) that management found further "opportunities to optimize operations" and on February 9, 2018 they approved their "2018 restructuring plan" which will hit the results of operations with at least $110M as described by them. Having said this, we can expect this expense (although non recurring) to be a factor in the results of this 1Q18 for the company.

Fifth factor to consider is the Interest Expense. Here the company has done a terrible job at keeping it contained. It has come from $14.6M on 2015 to a $34.5M in 2017 and an expected $51.9M in 2018. This only means that the borrowings has increased considerably meaning that the cash flow that it is being produced is not enough to cover the needs for the year. As I just mentioned the company is expecting at least a $51.9M expense in this area for 2018 (see page 41 of 10-K 2018). Given this number and considering that the 3.250% senior notes of $600M carry an interest that is payable semi-annually on June 15 and December 15 I am only assigning a total of $8.1M to take place during the 1Q18.

These factors I am considering are only based on what we know of the company and assumptions on the trends presented. If this generous scenario holds true the company will report a loss per share of ($0.14) or $61.6M. As of today, analysts are expecting a maximum loss per share of ($0.05) which is the equivalent to no more than $22M loss on the quarter on unchanged revenue from the same period a year ago.

I believe that after seeing this numbers and considering growth on the revenue side which is unlikely given the last couple of reports. The company will likely surprise the street to the negative side. Thus, hitting their stock price and making analysts rethink their positions. 

I have placed my money where my mouth is on this one and I bought some PUT options with expiration in July 2018 and January 2019. Here is the image from my broker account:

Right now I am sitting on a loss but then again I am expecting the quarter earnings release to take effect on the stock price. I plan on holding the PUTS expiring on July just a little after the earnings release but the ones expiring on Jan 2019 I will hold for at least until after the release of the third quarter results.

If you want to read a little more on why I think Under Armour is headed down I invite you to check out my other articles. I spoke about their deteriorating financials and about how I believe their margins are posed to shrink even more. I also wrote about the fact that management is preparing to leverage more and how that is a sign of distressed coming ahead.