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Why Under Armour, Inc. Isn't Sweating Sports Authority's Bankruptcy

By Steve Symington - Mar 11, 2016 at 10:05AM

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With one of its biggest accounts filing for Chapter 11, Under Armour reiterated guidance. Here's how.

Under Armour is partly able to shrug off Sports Authority's bankruptcy due to strong direct-to-consumer sales, Image source: Under Armour.

Sports Authority filed for Chapter 11 bankruptcy protection last week, announcing plans to close around 140 of its 463 stores as it works through the proceedings. It might seem reasonable from an investor's standpoint, then, to assume key customers of the massive sporting goods retailer might be in for hard times in the quarters ahead.

In Under Armour's (UAA 2.16%) case, however, that assumption couldn't be more wrong, as the Baltimore-based performance athletic apparel specialist promptly issued a press release last Friday to reiterate its previously issued guidance. More specifically, Under Armour continues to expect full-year 2016 revenue to climb 25% year over year, to $4.95 billion, which should translate to 23% growth in operating income, to $503 million. 

That's not to say every Sports Authority customer is off the hook. Shares of Performance Sports Group (NYSE: PSG), for example, plunged more 30% earlier this week after the company significantly reduced its full-year 2016 revenue and earnings guidance. Primarily to blame, Performance Sports stated, were writedowns of receivable balances related to Sports Authority's bankruptcy filing, and a related impending reduction in sales of baseball and softball products.

Of course, Performance Sports is a much smaller company and narrower in scope than Under Armour. But considering Under Armour typically commands a large, centrally located section in many Sports Authority stores, how is it that Under Armour isn't suffering in this case?

For one, keep in mind Under Armour will continue to sell products to the remaining 323 or so Sports Authority locations as the company continues to work through its bankruptcy proceedings. Make no mistake: This isn't a liquidation, but rather a reorganization aimed at helping Sports Authority shed debt, clean up its balance sheet and, in theory, emerge a stronger, leaner company in the end.

"The Sports Authority is a long-standing customer of the company," Under Armour's press release states, "and the Company intends to support them as they proceed through their restructuring."

In the meantime -- and in addition to continued sales to remaining stores -- Under Armour succinctly states it will work to offset the impact of Sports Authority's closed locations in 2016 with sales "through other channels and customers."

Take Under Armour's own direct-to-consumer business, for example, which grew 25% year over year last quarter to represent a full 36% of Under Armour's total net revenue. For perspective, that's up from 6% of total sales 10 years ago, and includes 25 global websites and almost 400 Under Armour-owned and partner retail stores globally.

Meanwhile, Under Armour also sells to other large retail chains, with two of its most important accounts including Dick's Sporting Goods (DKS 1.96%) and Foot Locker. In fact, though Dick's Sporting Goods disappointed investors with a weaker-than-expected fourth-quarter report earlier this week, Dick's CEO Ed Stack insisted "We're going to be pretty aggressive to try to capture some of [Sport's Authority's] displaced market share."

Stack further noted around 100 Dick's locations overlap with markets served by the 140 closing Sports Authority stores, so Dick's will increase labor and marketing spending at those locations to seize the opportunity. In the end, it seems safe to expect Under Armour should benefit from any share Dick's Sporting goods is able to capture.

In addition, note Under Armour has a tendency to under-promise and over-deliver on its guidance. In late 2013, for example, Under Armour management offered preliminary 2014 guidance for revenue and operating income growth to be at the lower end of its long-term growth targets of 20% to 25%. Several quarterly beats and guidance increases later, 2014 revenue and operating income had grown 31% and 34% over 2013, respectively. Similarly in late 2014, Under Armour management forecast preliminary 2015 net revenue and operating income growth of 22%. When all was said and done last year, Under Armour's 2015 revenue had grown a much more impressive 31%, to $1.17 billion, while operating income for the year grew a more modest 15% -- with the latter understandably held back by costs related to two two massive connected fitness acquisitions made in the first quarter. 

All told, it would seem Under Armour is either consistently performing better than it expects it will, or purposefully allowing for some wiggle room when it issues guidance early in the year. In any case, even given the challenge presented by Sports Authority's bankruptcy, it should come as no surprise Under Armour is still doing just fine.

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Stocks Mentioned

Dick's Sporting Goods, Inc. Stock Quote
Dick's Sporting Goods, Inc.
DKS
$76.85 (1.96%) $1.48
Under Armour, Inc. Stock Quote
Under Armour, Inc.
UAA
$8.51 (2.16%) $0.18
Foot Locker, Inc. Stock Quote
Foot Locker, Inc.
FL
$25.13 (-0.47%) $0.12

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