Under Armour Update

UA : NYSE : US$82.12
Target: US$92.00

Under Armour is a leading manufacturer of athletic apparel, footwear, and accessories. The company sells through wholesale channels of distribution, factory outlet stores, and through its e-commerce platform. Geographically, North America represents 94% of UA’s sales with the remaining 6% from international countries.

Consumer & Retail — Footwear and Apparel

Investment recommendation

We are expecting solid Q3 results from UA when it reports on 10/24 BMO. Despite generally inconsistent traffic at retail, athletic has been the outperformer with UA a key beneficiary of this trend, we believe. We estimate of 25% sales growth could prove conservative given new product intros at higher ASPs, accelerated shop-in-shop openings at DKS, and DTC growth. In addition, we believe modest gross margin upside stemming from the yet-unresolved Canadian duties issue could materialize. Separately, while UA has been vociferous about its intent to accelerate investments in international, resulting in less EPS flow-through, we believe this is more a Q4 event. As such, we are comfortable with our 69c EPS estimate (3c above the Street). With improving consistency in execution and sales momentum, we feel it appropriate to roll forward our valuation to 2015, resulting in our new price target of $92 from $76. We reiterate our BUY rating.
Investment highlights
 ColdGear Infrared (~$100M launch at 10%-15% higher prices), Alter Ego (first wholesale sell-in quarter), expanded Storm Fleece program, and a re-launch of bags should combine to propel sold sales growth in Q3. Also we expect ~60 new shop-in-shops at DKS to drive a significant sales lift that could contribute ~3c to Q3 EPS.
 While input cost comparisons are more difficult in Q3, we believe there could be modest upside to our -35bp gross margin estimate stemming from (1) better quality/margin excess product in outlets


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