Under Armour should return to profitable growth in the next year

Moody’s Corp. expects Under Armour Inc. to return to profitable growth in the next 12-to-18 months, the credit rating agency said in a Friday note.

But first, the athletic gear company must work through high inventory and bring its cost structure into line with the lower sales it should now expect. Analysts led by Michael Zuccaro think the brand still has global relevance and strength in its direct-to-consumer channel.

Under Armour UAA, +0.12% sales were growing 20%-plus until two years ago, but sales slowed to 3.1% growth last year, due largely to problems in its largest market, North America. Sales in the region fell 5.1% in 2017. All other areas grew more than 43%, but that wasn’t enough to offset the North American deceleration.

Read: Nike pulls back in North America in order to grow

“Innovation remains critical if it hopes to stay competitive with its two larger rivals, Nike and Adidas,” Moody’s wrote, with analysts characterizing some of the issues it has faced as “self-inflicted,” including “inconsistent go-to-market strategies.”

“There were also disruptions in their supply chain partially related to the implementation of a new enterprise resource planning system, which resulted in delayed shipments and loss of productivity, while the company also didn’t adequately forecast the slowdown in sales,” the note said.

Still, Moody’s is optimistic about the sporting goods market around the world, with opportunities overseas where Under Armour has room to develop.

“China, in particular, remains strong, with sales of active wear and athletic apparel benefitting from increased sports participation,” the note said.

Analysts even believe that Under Armour’s hacked app could spark growth, providing access to more than 220 million registered users.

Don’t miss:Under Armour says data of 150 million MyFitnessPal users was exposed

“While the company’s March 29 announcement that an unauthorized party acquired data associated with approximately 150 million MyFittnessPal user accounts in late February 2018 is a credit negative, it is too early to determine the ultimate impact on the company from, for example, a legal or consumer perspective,” Moody’s wrote.

Under Armour is now focused on restructuring and spending cuts, with a 2018 plan that the company expects will result in at least $75 million in savings annually as it goes into 2019. The new plan will result in $110 million to $130 million in charges, including $55 million in facility and lease terminations.

The company has the liquidity to cover the challenges for the year ahead, Moody’s said, and the nearest debt maturity, a $40 million for a real estate loan, isn’t due until December 2019.

For this year, things will get worse before they get better.

“For the first nine months of 2018, we expect the company to generate negative free cash flow due to lower earnings, normal working capital seasonality, continued spending in key growth areas, and $105 million in cash expenses related to the new 2018 restructuring plan,” Moody’s said.

Under Armour shares are down 18.6% for the past year while rival Nike Inc. shares NKE, +1.53% have rallied 18.6%. The Dow Jones Industrial Average DJIA, +1.07% has climbed 16.3% and the S&P 500 index SPX, +1.38% is up 11.5% for the period.

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