Under Armour (UAA) To Report Q2 Earnings: What Lies Ahead?

Under Armour, Inc. (NYSE:UAA) is scheduled to report second-quarter 2017 results on Aug 1, before the opening bell.

The question lingering in investors’ minds is, whether this marketer and distributor of apparel, footwear and accessories will be able to deliver a positive earnings surprise in the to-be-reported quarter. In the trailing four quarters, the company’s earnings have outpaced the Zacks Consensus Estimate with an average of 20.8%.

Let’s see how things are shaping up for this announcement.

What to Expect?

The Zacks Consensus Estimate for the quarter is pegged at a loss of 6 cents compared to earnings of 1 cent reported in the year-ago period. Furthermore, the Zacks Consensus Estimate for 2017 is pegged at 42 cents, down nearly 28% from 2016. Notably, the estimates have remained stable in the last 30 days. Analysts polled by Zacks expect revenues of $1,075 million for the said quarter, up about 7.4% from the year-ago quarter.

Under Armour forms part of the Consumer Discretionary sector that is currently placed at bottom 44% of the Zacks classified sectors (9 out of 16). Per the Earnings Outlook, total earnings for the sector are expected to decline 1.3%, while revenues are projected to improve 8%. We note that the broader sector has gained 2% in the last three months, underperforming the S&P 500 index’s growth of 4%.

What Does the Zacks Model Unveil?

Our proven model does not conclusively show earnings beat for Under Armour this quarter. This is because a stock needs to have both a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP for this to happen. You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Under Armour has an Earnings ESP of -16.67%. This is because the Most Accurate estimate is pegged at a loss of 7 cents, wider than the Zacks Consensus Estimate loss of 6 cents. Although the company’s Zacks Rank #3 increases the predictive power of ESP but we need a positive Earnings ESP in order to be confident about an earnings surprise.

Factors at Play

We note that Under Armour has been grappling with higher interest expense on account of higher debt level. Evidently, the company’s interest expenses increased to nearly $8 million in the first quarter compared with $5 million in the prior-year quarter. Further, management anticipates interest expenses to rise to roughly $40 million in 2017 from $26.4 million in 2016.

Under Armour continues to expect net revenue for 2017 to be nearly $5.4 billion, which represents an increase of 11–12% over the 2016 level. Notably, the company’s revenues grew 22% last year.

Moreover, it expects gross margin to be down slightly year over year due to foreign currency headwinds and better performance of footwear as well as international businesses in the overall mix that has lesser margins in comparison with apparel and North American businesses. In fact, due to increase in strategic investments, Under Armour anticipates operating income to decline to nearly $320 million from $420.3 million in 2016.

These factors have been well reflected in the company’s stock price performance. Evidently, Under Armour’s shares have plunged over 32% year to date against its industry’s gain of 0.3%. Currently, the industry is placed at top 48% of the Zacks classified industries (122 out of 256).

However, on the positive note, Under Armour’s sustained focus on brand development, expansion of direct-to-consumer and technology-based fitness businesses look encouraging.

In fact, with increasing consciousness about fitness among people, sports apparel makers are entering into the business of fitness gadgets and other tracking platforms to attract customers. To this end, the company is also taking steps and expanding its reach in the fitness space. Also, its international business is poised for growth.

Stocks with Favorable Combination

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Time Warner Inc. (NYSE:TWX) has an Earnings ESP of +4.24% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Lululemon Athletica Inc. (NASDAQ:LULU) has an Earnings ESP of +14.29% and a Zacks Rank #3.

AMC Networks Inc. (NASDAQ:AMCX) has an Earnings ESP of +2.14% and a Zacks Rank #3.

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