Under Armour Inc. (NYSE: UA) saw its shares slump in Wednesday’s session after one key independent research firm released a report downgrading the company. Although the firm expects Under Armour to post strong revenue going forward, Argus thinks that further expansion of the business will require substantial investment, which will add debt and interest expense and weigh on earnings growth.
As a result, Argus downgraded Under Armour to a Hold rating from Buy. The firm also lowered its EPS estimates for fiscal 2016 and 2017 to $0.56 and $0.74, from $0.60 and $0.78, respectively.
Note that Argus’s long-term rating remains Buy, based on the company’s innovative products and emphasis on its direct-to-consumer business. The firm cautioned that Under Armour shares are likely to be volatile and thus suitable only for risk-tolerant investors.
For the 2016 fiscal year, Under Armour expected that Sports Authority, which declared bankruptcy earlier this year, would generate $163 million in revenue. However after the bankruptcy, Under Armour now projects just $43 million in Sports Authority revenue, and in May the company reduced its 2016 revenue estimate from $5.0 billion to $4.925 billion.
Argus expects revenue growth in North America to be driven by Under Armour’s increased presence in department and specialty stores, higher sales of footwear and strength in the women’s and youth categories. In addition, with just 12% of revenue coming from overseas, the company has strong prospects to boost sales at specialty stores outside North America.
In the report, Argus detailed the company’s debt position as follows:
Long-term debt at the end of the quarter was $838 million, up from $624 million at the end of 2015. In May 2014, the company closed on a $150 million term loan. It drew $100 million of term-loan debt in 4Q to fund the Endomondo acquisition. The higher debt also reflected borrowings to finance two Connected Fitness acquisitions. Long-term debt/capital was 32.1% at the end of the second quarter.
Shares of Under Armour were trading down 4.7% at $39.61 on Wednesday, with a consensus analyst price target of $53.62 and a 52-week trading range of $31.61 to $52.94.