The casual and athleisure trends have grown and grown, but some investors and apparel watchers feel that the trend may have peaked. After the endless gains had been interrupted in Under Armour Inc. (NYSE: UA), Wells Fargo is now saying that enough is enough.
Wells Fargo raised its rating in Under Armour to Outperform from Market Perform on Monday and raised its valuation range to $44.00 to $46.00. The prior range had been $38.00 to $42.00.
Tom Nikic and Ike Boruchow at Wells Fargo feel that the noise from The Sports Authority’s bankruptcy is fading. They also feel that Under Armour’s distribution expansion could lead to a top-line reacceleration over the next 12 months to 18 months. They feel that the company is still in the early stages of growth, with Nike and Adidas being seven times and four times larger, respectively.
Wells Fargo sees Under Armour having strong opportunities to narrow the gap internationally with Nike and Adidas in their footwear and sportswear businesses. They also believe that Under Armour is under-earning on margins.
Monday’s upgrade represents Under Armour remaining as one of the strongest growth stories in the group, and any hint of reaccelerating growth after the third quarter should make the valuation easier to digest.
One issue to consider was that The Sports Authority had become a significantly smaller piece of Under Armour’s sales. That was down to 3% to 4% of sales, versus a peak of 15% of sales 10 years ago. Still, the firm pointed out that a loss of revenue in that distribution channel should persist into early 2107.
Inventory levels were seen as improving. Inventory growth at Under Armour accelerated every quarter in 2015 and remained at an elevated 40% to 45% growth rate in early 2016. Inventories at Dick’s, which is Under Armour’s biggest customer, exceeded sales growth for three consecutive years. That moderated last quarter and leaner inventory implied strong sell-throughs to the consumer.
On the valuation range, Wells Fargo believes that Under Armour is one of the strongest growth stories in the space, with opportunities for improvement on the financial side. The Wells Fargo team’s upgrade said:
Our valuation range of $44.00 to $46.00 is based on 42 times to 44 times Fiscal Year 2018 earnings per share of $1.05 EPS. The company needs to maintain industry-leading revenue growth to hit numbers, so if top-line growth falters, shares could come under heavy pressure. Also, Under Armour has experienced significant management turnover recently.
Under Armour shares were trading up 1.3% at $38.27 on Monday morning after the upgrade. Their 52-week range is $31.61 to $52.37, and the consensus analyst price target is up at $48.70.