Buy Under Armor’s Balance Sheet

Under Armour stock (NYSE: UAA) has lost nearly 60% since the beginning of the year due to the outbreak of COVID-19. The retail industry was already on shaky grounds, with more than 9,000 stores closing down in 2019, and the outbreak has only made things worse. Fading consumer demand, reduced discretionary spending, and stay-at-home orders resulting in store remaining closed continue to take their toll on the apparel industry. With a number of retailers including J.Crew, JCPenney filing for bankruptcy protection for bankruptcy, the very survival of companies in the retail industry has come into question.

Under Armour has faced the brunt of the outbreak of coronavirus with the company’s revenues shrinking by nearly 23% in Q1 2020 (ending March). Moreover, the cancellation of major sporting events, including the Olympics, NBA, and Euro 2020 have further impacted the company’s performance as the sale of apparel and merchandise associated with these events form a sizable part of Under Armour’s top line.

Trefis analyzes the potential impact of Covid Recession on Under Armour in an interactive dashboard with a focus on Under Armour’s liquidity reserves and concludes that Under Armour is in a strong financial position, and a Covid-19 recession will not impact the company’s cash reserves in FY2020. Although a downturn will impact the company’s revenues, cash flows, and ability to pay dividends, we believe the company has adequate financial reserves at its disposal to sail through this pandemic.

Impact On Under Armour’s Revenues 

• We estimate that a recession that persists through late Q3/early Q4 2020 can reduce the company’s revenues by 40% from $5.3 billion in 2019 to $3.2 billion in FY2020.
• Although stores have started opening, store traffic is expected to remain well below pre-pandemic levels for several months at least. Further, social distancing measures are likely to continue for a while, which will impact store capacity for the company.
• As a result, the company’s revenues could decline by about 40% in FY’20, on account of weaker demand, reduced mall traffic, potential supply constraints, and a reduction in discretionary spending.

Impact On Under Armour’s Cash Flows

• Under Armour’s cash flows are likely to take a hit in FY2020 due to a steep reduction in revenues and a potential hit to profitability.
• The company will have to offer merchandise at a deep discount to clear out the existing inventory which will hurt the company’s bottom line.
• However, Under Armour has taken a number of measures to mitigate the impact on its cash balance by raising $600 million under its credit facility and deciding to substantially reduce expenses across all operating heads, including store occupancy costs, capital expenditures, and reduced inventory purchases.
• Additionally, the company has suspended dividends and is unlikely to make share repurchases.

Despite these measures to conserve case, we estimate that Free cash flow from operations (excluding restructuring charges) (FCFO) will go down from $509 million in 2019 to around $95 million in 2020. Also, with expected capital expenditures of $88 million for the year, FCFO-CapEx will be just $7 million in FY2020.

Cash Balance Impact

• Taking all these factors together, we estimate that Under Armour will end the year with a cash balance of $1.4 billion – higher than the figure at the end of 2019 (please note that this figure will be lower if we account for restructuring charges)
• This figure includes $600 million, which Under Armour has raised from external sources.
• While the stringent measures taken by the company may dampen growth prospects in the near term, these moves by the company are essential for its long-term survival.

Conclusion

To sum things up, Under Armour has ample cash reserves and can successfully weather a recession through Q3/Q4 and a 40% decline in revenues by cutting Capex and share repurchases, and thanks to the $600 Million in fresh capital it raised recently. For an alternative scenario with a 30% change in revenue, see our full analysis of the impact of COVID recession on Under Armour

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

While Under Armour looks well-positioned, a recession could wipe off more than $1 billion from peer Gap’s cash reserves.

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