Under Armour

Lifestyle Brands and Retailers   

Camilo Lyon | Analyst |  Canaccord Genuity Inc. (US) |  CLyon@canaccordgenuity.com |  212.849.3978

US Equity Research Pallav Saini | Associate |  Canaccord Genuity Inc. (US) |  psaini@canaccordgenuity.com |  212.389.8054
16 March 2018

SELL Company Update

unchanged
PRICE TARGET US$9.00
unchanged
Price (15-Mar) US$15.90
Five reasons the 2018 plan is of great concern;
Ticker UAA-NYSE
reiterate SELL, $9 PT
52-Week Range (US$): 11.40 - 23.46
Investment recommendation
Avg Daily Vol (M)  : 6.8 Since its Q4 report one month ago, UAA is up 11% (and was up as much as 29% three
Market Cap  (US$M): 7,025 days after the print) vs. the SPX up 3.5%. After reflecting on the underlying message UAA
Shares Out. (M)  : 441.8
proposed for 2018, coupled with comments from its key retailers and where the stock
FYE Dec 2017A 2018E 2019E is trading today (22x EV/EBITDA), we have heavy doubts that the near-term actions it is
Sales  (US$M) 4,977 5,083 5,250 taking will result in the desired outcome of stability and profitable growth. Rather, we see
P/Sales (x)  1.4 1.4 1.3 the risk of a prolonged and pervasive promotional cycle, and subsequently a brand that
EPS  (US$) 0.19 0.13 0.19 could lose its cachet, none of which is embedded in current valuation. Below we highlight
P/E (x)  82.9 118.7 85.7 the five concerns weighing on us. We reiterate our SELL rating and $9 PT.
Quarterly Sales  Q1 Q2 Q3 Q4
1. Offprice clearance is an ill-fitting band-aid: UAA enters 2018 with a heavy excess
2017A 1,117 1,088 1,406 1,365
inventory position of ~$121M in North America. We estimate this inventory will
2018E 1,119 1,132 1,439 1,392 translate into 5m units for sale at discounted prices that we fear will disrupt the pricing
2019E 1,166 1,148 1,492 1,444 architecture in fall ‘18. We have two clear examples from the fall '15 when both VFC (via
North Face) and DECK (via UGG) used the offprice channel to clear excess inventory,
Quarterly EPS  Q1 Q2 Q3 Q4 helping near-term results but hurting full-price sell-through in fall of ‘16. This decision
2017A (0.01) (0.03) 0.22 (0.00) by both DECK and VFC created a vicious inventory cycle dependent on the offprice
2018E (0.05) (0.06) 0.25 (0.00) channel. VFC and DECK broke that dependence last year (at the expense of near-
2019E (0.04) (0.06) 0.27 0.00 term sales growth) and were rewarded with a healthier channel and greater full-price
26 sales in fall '17. To us, this is the clearest example of UAA’s impending 2H gross margin
24 risk (guidance implies +150bps). With a flood of clearance inventory entering the
22
market (by our math ~12% of expected 2H NA units available for sale) and little product
differentiation between it and full-price product, we suspect UAA's retail partners like
20
KSS/DKS will suffer disproportionately as the need to convert sales accelerates the
18 promotional cadence.
16
2. Without meaningful innovation, long-term NA growth will be LSD at best: Until UAA
14 segments its channels appropriately, and innovates with sufficient volume, we see long-
12 run NA growth rates returning to just low single digits. First, the continued consolidation
10
of the sporting goods channel and general slowing of new door openings is likely to cap
UAA’s growth for the foreseeable 2-3 years. DKS’ steady-state comp growth has been
May-17

Aug-17

Mar-18
Nov-17
Apr-17

Dec-17
Sep-17

Feb-18
Jun-17

Oct-17

Jan-18
Jul-17

1%-2% at best (DKS guided '18 comps flat to -LSD), and we see no reason why UAA
UAA should outpace that rate. Furthermore, channel expansion looks unlikely and recent
S&P�500�(rebased)
decisions to rationalize SKUs come with little clarity of what will fill that gap. What's
Source:�FactSet
more, retailers (e.g. DKS and HIBB) are shifting sq.ft. away from UAA to hotter brands like
Priced as of close of business 15 March 2018 
NKE and Adidas as well as private label brands, all negative for UAA.
Under Armour is a leading manufacturer of athletic apparel, 3. SKU rationalization is long overdue but what fills the gap? UAA spoke of plans to
footwear, and accessories, selling its products through
wholesalers, factory outlet stores, and online.
reduce its SKU count by 30-40% by 2019. While this move is long overdue, we question
how much sales volume is being lost. In a base-case scenario, we assume that lost sales
could represent 10-20% of revenue. With that in mind, the next important question is:
what fills the void? In our view, there are not enough new markets or channels in NA for
UAA to pursue, thus leaving innovation – which has been slow to materialize – as the
lone driver of accelerated growth. As such, this SKU rationalization is merely a re-sizing
the business at a lower level, which augurs for muted growth thereafter.
Canaccord Genuity is the global capital markets group of Canaccord Genuity Group Inc. (CF : TSX)
The recommendations and opinions expressed in this research report accurately reflect the research analyst's personal, independent and objective views about any and all
the companies and securities that are the subject of this report discussed herein.

For important information, please see the Important Disclosures beginning on page 5 of this document.
 Under Armour
Company Update

4. Consumer poll shows UAA brand waning in a key growth driver – footwear: We have
been conducting periodic polls of consumers asking a simple question – what's your
favorite athletic/lifestyle footwear brand? In December, we asked over 6,000
consumers this question to which 48% said NKE and 16% said UAA. For our March
poll, our universe expanded to over 11,000 consumers. Surprisingly, UAA dropped
precipitously to 7% from 16% while NKE inched 1% higher to 49%. This is particularly
disconcerting because footwear (along with international) is a key growth driver.
What’s more, UAA’s drop in popularity was equally pronounced among both men and
women (see Figure 1 on the next page).
5. The beast has awakened: NKE appears to be resurging (or at least accelerating the
innovation) and the strength of Adidas can't be ignored. NKE’s new “triple double”
directive is undoubtedly taking shape. Specifically, we see signs that its product
pipeline is gaining traction, which would not be good for UAA. Moreover, Adidas has
become a more formidable competitor in recent years as evidenced by its 29% growth
in NA in Q4. The competitive pressures facing UAA at a time when its product is most
susceptible to share losses will be difficult to combat without innovative product and
marketing capital.
Valuation
Our $9 PT is a blend of 45x our 2019 EPS estimate, 22x EV/EBITDA, and DCF.

Stock prices of other companies discussed in this report:

Adidas (ADS : FR : €194.40 | Not Rated)
Deckers Outdoor Corporation (DECK : NYSE : $90.93 | BUY)
Dick's Sporting Goods (DKS : NYSE : $34.82 | HOLD)
Hibbett Sports (HIBB : NASDAQ : $22.50| BUY)
Kohl’s (KSS : NYSE : $61.49 | Not Rated)
Nike (NKE : NYSE : $66.39 | HOLD)
VF Corporation (VFC : NYSE : $74.72| BUY)

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 Under Armour
Company Update

Figure 1: Consumer poll shows UAA losing popularity in footwear

Footwear brand preference (men & women)

60%
48% 49%
50%

40%

30%

20% 16% 14% 13%

10% 7%

0%
NKE Adidas UAA

December March

Footwear brand preference (men)

50% 46%
43%
40%

30%

20% 17% 17% 17%

11%
10%

0%
NKE Adidas UAA

December March

Footwear brand preference (women)

60%
49% 49%
50%

40%

30%

20% 15% 14% 12%

10% 6%

0%
NKE Adidas UAA

December March

Source: Canaccord Genuity survey results

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 Under Armour
Company Update

Figure 2: UAA projected income statement

December Fiscal
Incom e Statem ent 1Q17 2Q17 3Q17 4Q17 1Q18E 2Q18E 3Q18E 4Q18E 1Q19E 2Q19E 3Q19E 4Q19E 2014 2015 2016 2017 2018E 2019E
Revenue
Apparel 715.4 680.7 939.4 951.7 708.3 707.9 959.1 961.2 729.5 707.9 983.1 980.4 2,291.5 2,801.1 3,229.1 3,287.1 3,336.4 3,400.9
Footw ear 269.7 236.9 285.1 246.2 275.1 246.4 290.8 253.6 291.6 251.3 308.2 273.9 431.0 677.7 1,010.7 1,037.8 1,065.8 1,125.0
Accessories 89.1 122.6 123.5 110.7 89.1 125.0 126.0 115.1 93.6 130.0 131.0 120.8 275.4 346.9 406.6 445.8 455.2 475.4
Total Net Sales 1,074.2 1,040.2 1,347.9 1,308.5 1,072.4 1,079.3 1,375.8 1,329.9 1,114.6 1,089.3 1,422.3 1,375.1 2,997.9 3,825.7 4,646.5 4,770.8 4,857.4 5,001.3
Licensing revenues 24.2 25.1 34.3 32.9 26.6 28.4 38.8 37.2 30.1 32.1 43.8 42.1 67.2 84.2 99.8 116.6 131.0 148.0
Connected Fitness 18.9 23.0 23.4 23.9 19.9 24.6 24.6 25.1 21.3 26.3 26.3 26.8 19.2 53.4 80.4 89.2 94.1 100.7
Intersegment eliminations 0.0 0.0 0.0 0.0 0.0 0.0 (1.4) 0.0 0.0 0.0
Total Net Revenue 1,117.3 1,088.2 1,405.6 1,365.4 1,118.9 1,132.3 1,439.1 1,392.2 1,166.0 1,147.6 1,492.4 1,444.0 3,084.4 3,963.3 4,825.3 4,976.6 5,082.5 5,250.0

COGS 611.9 590.0 756.5 774.2 613.2 628.4 762.7 775.4 636.6 625.4 783.5 801.4 1,572.2 2,057.8 2,584.7 2,732.6 2,779.8 2,847.0
Gross Profit 505.4 498.2 649.2 591.2 505.8 503.9 676.4 616.7 529.4 522.2 708.9 642.6 1,512.2 1,905.5 2,240.6 2,244.0 2,302.7 2,403.0
SG&A 497.9 503.0 498.2 590.8 519.8 530.7 518.1 608.6 540.6 546.6 536.2 629.9 1,158.3 1,497.0 1,823.1 2,089.9 2,177.2 2,253.3
Operating Incom e 7.5 (4.8) 151.0 0.3 (14.0) (26.8) 158.3 8.2 (11.2) (24.5) 172.6 12.7 354.0 408.5 417.5 154.1 125.6 149.7

Interest expense, net (7.8) (7.8) (9.6) (9.3) (10.0) (10.0) (9.5) (9.5) (9.0) (9.0) (9.0) (9.0) (5.3) (14.6) (26.4) (34.5) (39.0) (36.0)
Other Income, net 2.6 (2.9) (1.1) (2.2) (3.0) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) (6.4) (7.2) (2.8) (3.6) (6.0) (4.0)
Pretax Income 2.3 (15.5) 140.3 (11.2) (27.0) (37.8) 147.8 (2.3) (21.2) (34.5) 162.6 2.7 342.2 386.7 388.3 115.9 80.6 109.7
Taxes 4.6 (3.2) 40.3 (10.6) (4.1) (9.5) 35.5 (0.6) (5.4) (8.7) 41.1 0.7 134.2 154.1 132.5 31.0 21.4 27.8
Net Income ($2.3) ($12.3) $100.0 ($0.6) ($23.0) ($28.4) $112.3 ($1.8) ($15.9) ($25.7) $121.5 $2.0 $208.0 $232.6 $255.8 $84.9 $59.2 $81.9
EPS, diluted ($0.01) ($0.03) $0.22 ($0.00) ($0.05) ($0.06) $0.25 ($0.00) ($0.04) ($0.06) $0.27 $0.00 $0.48 $0.53 $0.57 $0.19 $0.13 $0.19
Factset Consensus ($0.03) ($0.06) $0.19 $0.00 ($0.05) ($0.06) $0.24 $0.04 ($0.02) ($0.04) $0.29 $0.08 $0.49 $0.54 $0.58 $0.19 $0.18 $0.29

Shares outstanding, diluted 439.4 440.4 448.4 441.8 441.8 441.8 441.8 441.8 441.8 441.8 441.8 441.8 436.0 440.9 444.9 442.5 441.8 441.8

Margin Analysis
Gross Margin Total 45.2% 45.8% 46.2% 43.3% 45.2% 44.5% 47.0% 44.3% 45.4% 45.5% 47.5% 44.5% 49.0% 48.1% 46.4% 45.1% 45.3% 45.8%
y/y change (bps) (0.64%) (1.94%) (1.29%) (1.42%) (0.03%) (1.28%) 0.82% 1.00% 0.20% 1.00% 0.50% 0.20% 0.29% (0.95%) (1.65%) (1.34%) 0.22% 0.46%
SG&A 44.6% 46.2% 35.4% 43.3% 46.5% 46.9% 36.0% 43.7% 46.4% 47.6% 35.9% 43.6% 37.6% 37.8% 37.8% 42.0% 42.8% 42.9%
leverage/(deleverage) (2.01%) (0.43%) (1.51%) (11.11%) (1.89%) (0.65%) (0.56%) (0.44%) 0.09% (0.76%) 0.07% 0.09% (0.18%) (0.22%) (0.01%) (4.21%) (0.84%) (0.08%)
EBIT Margin 0.7% (0.4%) 10.7% 0.0% (1.3%) (2.4%) 11.0% 0.6% (1.0%) (2.1%) 11.6% 0.9% 11.5% 10.3% 8.7% 3.1% 2.5% 2.9%
Other income 0.2% (0.3%) (0.1%) (0.2%) (0.3%) (0.1%) (0.1%) (0.1%) (0.1%) (0.1%) (0.1%) (0.1%) (0.2%) (0.2%) (0.1%) (0.1%) (0.1%) (0.1%)
Taxes 199.4% 20.6% 28.7% 94.8% 15.0% 25.0% 24.0% 24.0% 25.3% 25.3% 25.3% 25.3% 39.2% 39.9% 34.1% 26.8% 26.5% 25.3%
Net Income (0.2%) (1.1%) 7.1% (0.0%) (2.1%) (2.5%) 7.8% (0.1%) (1.4%) (2.2%) 8.1% 0.1% 6.7% 5.9% 5.3% 1.7% 1.2% 1.6%
Grow th Analysis
Revenue
Apparel 7.3% 11.1% (8.0%) 2.5% (1.0%) 4.0% 2.1% 1.0% 3.0% 0.0% 2.5% 2.0% 30.0% 22.2% 15.3% 1.8% 1.5% 1.9%
Footw ear 2.0% (2.4%) 2.2% 9.5% 2.0% 4.0% 2.0% 3.0% 6.0% 2.0% 6.0% 8.0% 44.2% 57.3% 49.1% 2.7% 2.7% 5.6%
Accessories 11.8% 21.7% 1.4% 6.1% 0.0% 2.0% 2.0% 4.0% 5.0% 4.0% 4.0% 5.0% 27.4% 26.0% 17.2% 9.6% 2.1% 4.4%
Total Net Sales 6.3% 8.8% (5.2%) 4.0% (0.2%) 3.8% 2.1% 1.6% 3.9% 0.9% 3.4% 3.4% 31.7% 27.6% 21.5% 2.7% 1.8% 3.0%
Licensing revenues 24.6% 19.5% 16.4% 10.1% 10.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% 13.0% 22.3% 25.3% 18.6% 16.8% 12.4% 13.0%
Connected Fitness 2.3% (2.2%) 15.9% 30.8% 5.0% 7.0% 5.0% 5.0% 7.0% 7.0% 7.0% 7.0% - 177.8% 50.6% 10.9% 5.5% 7.0%
Total Net Revenue 6.6% 8.7% (4.5%) 4.6% 0.1% 4.0% 2.4% 2.0% 4.2% 1.4% 3.7% 3.7% 32.3% 28.5% 21.8% 3.1% 2.1% 3.3%
Gross Profit Dollars 5.2% 4.3% (7.1%) 1.3% 0.1% 1.1% 4.2% 4.3% 4.7% 3.6% 4.8% 4.2% 33.0% 26.0% 17.6% 0.2% 2.6% 4.4%
Gross Profit Dollars ex-licensing revs 4.3% 3.6% (8.1%) 0.8% (0.4%) 0.5% 3.7% 3.8% 4.2% 3.1% 4.3% 3.6% 33.6% 26.0% 17.5% (0.6%) 2.1% 3.8%
SG&A 11.7% 9.8% (0.2%) 40.7% 4.4% 5.5% 4.0% 3.0% 4.0% 3.0% 3.5% 3.5% 32.9% 29.2% 21.8% 14.6% 4.2% 3.5%
EBIT (78.4%) (124.7%) (24.2%) (99.8%) (286.2%) 460.8% 4.8% 2273.7% (20.0%) (8.9%) 9.1% 55.9% 33.5% 15.4% 2.2% (63.1%) (18.5%) 19.2%
Net Income (111.8%) (294.0%) (22.0%) (100.6%) 911.4% 130.6% 12.3% 206.4% (31.0%) (9.3%) 8.2% (214.9%) 30.1% 11.8% 10.0% (66.8%) (30.3%) 38.4%
EPS (112.0%) (295.1%) (22.4%) (100.6%) 905.8% 129.8% 14.0% 206.4% (31.0%) (9.3%) 8.2% (214.9%) 27.9% 10.5% 9.0% (66.6%) (30.2%) 38.4%
Source: Company reports, Canaccord Genuity Research

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 Under Armour
Company Update

Appendix: Important Disclosures

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Investment Recommendation
Date and time of first dissemination: March 16, 2018, 05:11 ET
Date and time of production: March 16, 2018, 05:11 ET
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Distribution of Ratings:
Global Stock Ratings (as of 03/16/18)
Rating Coverage Universe IB Clients
# % %
Buy 566 61.06% 40.28%
Hold 241 26.00% 25.73%
Sell 19 2.05% 10.53%
Speculative Buy 101 10.90% 61.39%
927* 100.0%
*Total includes stocks that are Under Review

Canaccord Genuity Ratings System

BUY: The stock is expected to generate risk-adjusted returns of over 10% during the next 12 months.
HOLD: The stock is expected to generate risk-adjusted returns of 0-10% during the next 12 months.
SELL: The stock is expected to generate negative risk-adjusted returns during the next 12 months.
NOT RATED: Canaccord Genuity does not provide research coverage of the relevant issuer.
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SPECULATIVE: Stocks bear significantly higher risk that typically cannot be valued by normal fundamental criteria. Investments in the
stock may result in material loss.

Sell unchanged Target Price US$9.00 unchanged | 16 March 2018 Lifestyle Brands and Retailers 5
 Under Armour
Company Update

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 Under Armour
Company Update

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Sell unchanged Target Price US$9.00 unchanged | 16 March 2018 Lifestyle Brands and Retailers 7
 Under Armour
Company Update

Copyright © Canaccord Genuity Inc. 2018 – Member FINRA/SIPC

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Sell unchanged Target Price US$9.00 unchanged | 16 March 2018 Lifestyle Brands and Retailers 8