Sports apparel and footwear company Under Armour Inc. (NYSE: UAA) gave shareholders a shot of optimism with its fiscal Q3 2024 earnings release. The company is gaining traction with its turnaround plan thanks to margin expansion and direct-to-consumer (DTC) business growth. The consumer discretionary sector company has shifted its focus to its core strength in athletic apparel and footwear, helping drive profits despite revenues still pulling back from year-ago levels.

With Under Armour shares trading at just 9x earnings, it's selling at a discount to rivals Nike Inc. (NYSE: NKE) at 30x and Lululemon Athletic Inc. (NASDAQ: LULU) shares at 59x earnings. Value investors should take a closer look under the hood.

Shrinking inventory to grow margins

Under Armour's biggest challenge since 2022 has been managing its inventory bloat, resulting in margin contraction. 

On a brighter note, Under Armour boosted gross margins by 100 bps to 45.2%, thanks to proactive inventory management and falling freight expenses. A higher percentage of sales to off-price channels and higher promotions in its DTC business helped it trim inventory levels by 9% year-over-year (YoY) down to $1.1 billion, a noticeable improvement. Compared to its fiscal Q4 2023, gross margins fell 310 bps to 43.4%, while inventory surged 44% to $1.2 billion.

Normalization still lingers

The post-COVID opening surge temporarily boosted metrics, but the normalization hangover continues as YoY revenues continued to decline 6.1% YoY. 

Even Nike has just started to turn revenue growth around, growing just 0.8% YoY in its latest quarter. Lululemon is firmly in growth mode, with revenues surging 18.5% YoY in its latest quarter. 

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On the right track

On February 8, Under Armour reported fiscal Q3 2024 EPS of 19 cents, beating consensus analyst estimates of 11 cents by 8 cents. Revenues continue to slip 6.1% YoY to $1.49 billion, falling short of $1.5 billion consensus analyst estimates. Wholesale revenues fell 13% to $712 million, while DTC revenues rose 4% to $741 million. Its UA Rewards Loyalty Program enrollment grew to three million members.

Raising guidance 

Under Armour raised its fiscal full-year 2024 forecasts. EPS was raised to between 50 and 52 cents, up from 47 to 51 cents, versus 49 consensus analyst estimates. Revenues should fall 3% to 4% for a range between $5.67 billion to $5.73 billion versus $5.74 billion analyst estimates.

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More work to do in North America 

Under Armour's recently appointed CEO, Stephanie Linnartz, admitted the turnaround in driving sales in its largest market, the United States, has much more work to do. Its North American business was down 12% in the quarter. She contends the turnaround in the U.S. will be a multi-year journey to return to growth.

Upgrading executive leadership 

She has spent her first year as the new CEO, prioritizing bolstering the company's leadership by adding new experienced officers to spearhead design, product, consumer, supply chain, and communications teams. The company has streamlined to become more agile and empower faster decision-making, implementing small batch run cycles. The company will launch NEOLAST, a new performance stretch fabric as a high-performance alternative to spandex.

Nearly two-thirds of her executive leadership team is newly appointed. Linnartz commented, "Given our product creation cycle, it will take time for this newly led team to start driving more critical mass into the equation. Yet we're not hitting pause until then. We have much newness to be excited about as we head into spring summer 2024, especially in apparel."

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Daily ascending triangle pattern

The daily candlestick chart on UAA illustrates an ascending triangle pattern. The ascending trend started at a $7.19 low on January 17. The upper flat-top trendline formed at $8.19. 

The ascending trendline triggered a market structure low (MSL) breakout at $7.55, with higher lows on pullbacks as UAA approached the apex point. The daily relative strength (RSI) index rose through the 50-band. Pullback support levels are at $7.55, $7.19, $6.94 and $6.56.