Under Armour Inc (NASDAQ: UAA) shares are recovering slightly after suffering a massive drop Monday after the company confirmed it's facing an investigation by the Securities and Exchange Commission and Justice Department into its accounting practices.
On Monday, the apparel company reported a third-quarter EPS and sales beat.
Baird Downgrades Stock
Baird analyst Jonathan Komp said he's highly disappointed to step to the sidelines on Under Armour, as he still believes the company can be a compelling multiyear growth story.
Komp has held a positive view on Under Armour’s leadership, ongoing brand transformation and multiyear recovery, but downgraded the stock from Outperform to Neutral due to the federal investigation.
“While the Q3 fundamental update was relatively consistent with recent expectations, the unexpected news and subsequent disclosure of an ongoing accounting-related investigation by the SEC/DOJ represents tangential risk to our prior thesis."
Komp also lowered the price target from $31 to $20.
Feinseth Sees Risk Ahead
Under Armour’s strong brand equity and rapid growth have helped it sustain an earnings multiple of over 50x, which now puts the stock in a vulnerable position if its revenue and earnings numbers are forced to be restated due to the investigation, said Tigress Financial Partners analyst Ivan Feinseth.
“I don’t view the recent weakness as a buying opportunity and believe significant risk and downside exists,” he said.
Wedbush Lowers Price Target
Although Under Armour reported a third-quarter earnings beat Monday, “the FY19 sales outlook faces incremental troubles driven by additional direct-to-consumer pressure, further diminishing confidence in the brand, long-term plan, and management’s guidance credibility,” Wedbush analyst Christopher Svezia said a Monday note.
“While 3Q saw beats across lines, pressure in North America continued with the DTC channel seeing deeper than expected headwinds, along with footwear (consumers likely turning to Nike Inc (NYSE: NKE), Adidas AG (ADR) (OTC: ADDYY), and HOKA, among others),” the analyst said.
Wedbush maintained a Neutral rating and lowered the price target from $23 to $20.
KeyBanc: 2020 Is Crucial
The coming year will be critical to gauge momentum in footwear, a segment Under Armour is highly dependent on for future growth — and an area where it has failed to lived up to expectations, KeyBanc Capital Markets analyst Edward Yruma said in a note.
“Under Armour’s footwear business continues to post lumpy results, declining -12% this quarter following last quarters +5%,” the analyst said.
Under Armour continues to segment its running footwear business and is focused on the high end of the market, he said.
“The company also recently launched the Liquify product in the department store channel. UAA guidance points to an acceleration in the footwear business in the 4Q and heading into 2020. After several years of low-single digit sales growth in footwear, we view 2020 as crucial toward UAA leveraging footwear to drive top-line growth.”
KeyBanc maintained an Overweight rating on Under Armour and lowered its price target from $30 to $23.
Under Armour shares were trading at $18.08 at time of publication.
Photo courtesy of Under Armour.