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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
26 January 2018

SELL Estimates Revised


unchanged
PRICE TARGET US$8.00
unchanged
Price (25-Jan) US$14.57
Bracing for another reset lower as no stabilization
Ticker UAA-NYSE
is in sight; lower estimates, reiterate SELL
52-Week Range (US$): 11.40 - 29.66 Investment recommendation
Avg Daily Vol (M)  : 6.8
Market Cap  (US$M): 6,372
We remain cautious on UAA as we believe 2018 will be another year in which the
Shares Out. (M)  : 448.4 company will seek to stabilize its NA business. Thus far, we see little in the way of
traction, which portends that initial 2018 guidance could dramatically disappoint. We
FYE Dec 2016A 2017E 2018E are lowering our 2018 estimates further below consensus and now call for $70.9M in
Sales  (US$M) 4,828 4,964↑ 5,059↓ EBIT and 5c in EPS vs. $137.7M/16c previously. Our negative stance is based on three
Previous - 4,929 5,147 main factors: (1) the long duration needed to engineer a turnaround of this magnitude,
P/Sales (x)  1.3 1.3 1.3 (2) product improvements likely not tangible until 2019, and (3) no macro benefits such
EPS  (US$) 0.58 0.19 0.05↓ as tax reform to boost earnings. Turning around a brand that has suffered product /
Previous - - 0.16 fashion/ execution issues does not happen quickly. One only need to look at NKE as
P/E (x)  24.4 73.6 273.4
the analog. NKE is entering year 3 of its efforts to re-energize its brand and is only just
Quarterly Sales  Q1 Q2 Q3 Q4
now beginning to see green shoots. Moreover, NKE has a gargantuan balance sheet to
2016A 1,048 1,001 1,472 1,308 support and amplify its recovery, which it has done. By contrast UAA (one year into its
2017E 1,117A 1,088A 1,406A 1,352 turn) does not have this balance sheet luxury as its operating income has dramatically
2018E 1,119 1,068 1,469 1,403 suffered, and arguably will be capital constrained in 2018. At minimum, we believe
it could take UAA another 12-18 months to fully regain its footing and begin to grow
Quarterly EPS  Q1 Q2 Q3 Q4 profitably. As such, we expect 2018 guidance to come in well below street expectations.
2016A 0.04 0.01 0.29 0.23 For 2018, we are projecting total revenue growth of 1.6% vs. +4.6% consensus (with NA
2017E (0.01)A (0.03)A 0.22A 0.00 -6.8% and intl +30%), thus driving our $8 PT (~45% downside). We reiterate our SELL.
2018E (0.08) (0.11) 0.18 0.06
Turnarounds take time, and this one needs more: We continue to be of the opinion
40
that UAA’s turnaround will not materialize before 2019. To put things in perspective,
35 it has taken NKE two years to show modest signs of revival, despite its financial and
operational strength. Conversely, UAA appears capital constrained as it lacks the
30 NKE-esque resources to engineer a faster turnaround. Also, UAA’s fixed cost expense
25
structure (e.g. 5th Ave. NYC store, escalating endorsement costs), leave little room
for expense cut flexibility. Considering these factors, we are hard-pressed to see an
20 inflection in its earnings profile before 2019.
15
Frisk’s impact not likely to be felt before 2019: We believe President Patrick Frisk
is taking the necessary steps to position the company for long term success. Our
10 understanding is that he is intimately involved and focused on product and operational
improvement. That said, we do not expect to see a material impact on the business
May-17

Aug-17
Mar-17

Nov-17
Apr-17

Dec-17
Feb-17

Sep-17
Jun-17

Oct-17

Jan-18
Jul-17

before 2019 at the earliest. Until then, retailers we speak with are planning UAA down in
UAA
S&P�500�(rebased)
2018 and shifting buys to NKE and Adidas.
Source:�FactSet Sector tailwinds not helping UAA; NA needs to shrink before it can grow: In our
Priced as of close of business 25 January 2018  recently published 2018 outlook piece (here), we highlighted tax tailwinds and category
Under Armour is a leading manufacturer of athletic apparel,
improvement trends (i.e. athletic footwear) that could benefit many companies in our
footwear, and accessories, selling its products through coverage. That said, we do not see UAA as benefiting materially from either of these
wholesalers, factory outlet stores, and online. tailwinds as tax reform only adds 1c to 2018 EPS and category trends favor improving
trends in footwear. At UAA, we see little in the way of compelling innovation (both now
and in the pipeline) and argue that it needs to shrink its SKU count to improve its overall
unit productivity. As such, further share losses to NKE/Adidas are likely this year.

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 4 of this document.
Under Armour
Estimates Revised

Valuation
Our $8 price target is a blend of 55x our 2018 EPS estimate, 30x EV/EBITDA, and
DCF.

Canaccord Genuity also provides research coverage of:


Nike (NKE : NYSE : $67.71 | HOLD)

2
Sell unchanged Target Price US$8.00 unchanged | 26 January 2018 Lifestyle Brands and Retailers 2
Under Armour
Estimates Revised

Figure 1: UA projected income statement


December Fiscal
Incom e Statem ent 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17E 1Q18E 2Q18E 3Q18E 4Q18E 2012 2013 2014 2015 2016 2017E 2018E
Revenue
Apparel 666.6 612.8 1,021.2 928.5 715.4 680.7 939.4 956.4 701.1 646.6 976.9 985.1 1,385.4 1,762.2 2,291.5 2,801.1 3,229.1 3,291.9 3,309.8
Footw ear 264.2 242.7 278.9 227.7 269.7 236.9 285.1 232.3 277.7 244.0 299.3 243.9 239.0 298.8 431.0 677.7 1,013.5 1,023.9 1,065.0
Accessories 79.7 100.7 121.8 104.3 89.1 122.6 123.5 107.5 92.7 125.0 129.7 111.8 165.8 216.1 275.4 346.9 406.6 442.7 459.1
Total Net Sales 1,010.5 956.3 1,421.9 1,260.6 1,074.2 1,040.2 1,347.9 1,296.1 1,071.5 1,015.7 1,405.9 1,340.7 1,790.1 2,277.1 2,997.9 3,825.7 4,649.3 4,758.4 4,833.9
Licensing revenues 19.4 21.0 29.5 29.9 24.2 25.1 34.3 34.4 27.4 28.4 38.8 38.9 44.8 55.0 67.2 84.2 99.8 118.1 133.4
Connected Fitness 18.5 23.5 20.2 18.3 18.9 23.0 23.4 21.9 19.9 24.1 24.6 23.0 0.0 0.0 19.2 53.4 80.4 87.2 91.6
Intersegment eliminations (0.8) 0.0 0.0 (0.7) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (1.4) 0.0 0.0
Total Net Revenue 1,047.7 1,000.8 1,471.6 1,308.1 1,117.3 1,088.2 1,405.6 1,352.5 1,118.8 1,068.2 1,469.2 1,402.6 1,834.9 2,332.1 3,084.4 3,963.3 4,828.2 4,963.7 5,058.8

COGS 567.1 523.1 772.9 721.6 611.9 590.0 756.5 793.9 607.5 569.3 778.7 785.5 955.6 1,195.4 1,572.2 2,057.8 2,584.7 2,752.3 2,741.0
Gross Profit 480.6 477.6 698.6 586.6 505.4 498.2 649.2 558.6 511.3 498.8 690.5 617.2 879.3 1,136.7 1,512.2 1,905.5 2,243.5 2,211.4 2,317.8
SG&A 445.8 458.3 499.3 419.8 497.9 503.0 498.2 545.7 547.7 553.3 572.9 573.0 670.6 871.6 1,158.3 1,497.0 1,823.1 2,044.8 2,246.9
Operating Incom e 34.9 19.4 199.3 166.8 7.5 (4.8) 151.0 12.8 (36.4) (54.5) 117.6 44.1 208.7 265.1 354.0 408.5 420.3 166.6 70.9

Interest expense, net (4.5) (5.8) (8.2) (8.0) (7.8) (7.8) (9.6) (9.0) (9.0) (9.0) (9.0) (9.0) (5.2) (2.4) (5.3) (14.6) (26.4) (34.2) (36.0)
Other Income, net 2.7 (3.0) (0.8) (1.7) 2.6 (2.9) (1.1) (1.0) (1.0) (1.0) (1.0) (1.0) (5.3) (4.1) (6.4) (7.2) (2.8) (2.4) (4.0)
Pretax Income 33.1 10.7 190.3 157.1 2.3 (15.5) 140.3 2.8 (46.4) (64.5) 107.6 34.1 198.3 258.6 342.2 386.7 391.1 129.9 30.9
Taxes 13.9 4.3 62.1 52.2 4.6 (3.2) 40.3 2.5 (11.7) (16.3) 27.2 8.6 74.7 98.7 134.2 154.1 132.5 44.2 7.8
Net Income $19.2 $6.3 $128.2 $104.9 ($2.3) ($12.3) $100.0 $0.3 ($34.7) ($48.2) $80.4 $25.5 $123.6 $159.9 $208.0 $232.6 $258.7 $85.7 $23.1
EPS, diluted $0.04 $0.01 $0.29 $0.23 ($0.01) ($0.03) $0.22 $0.00 ($0.08) ($0.11) $0.18 $0.06 $0.29 $0.37 $0.48 $0.53 $0.58 $0.19 $0.05
Factset Consensus $0.05 $0.01 $0.25 $0.25 ($0.03) ($0.06) $0.19 $0.00 ($0.04) ($0.04) $0.24 $0.09 $0.60 $0.72 $0.49 $0.54 $0.58 $0.19 $0.23

Shares outstanding, diluted 443.3 442.9 445.9 447.6 439.4 440.4 448.4 448.4 439.4 439.4 448.4 448.4 425.2 428.6 436.0 440.9 444.9 444.2 443.9

Margin Analysis
Gross Margin Total 45.9% 47.7% 47.5% 44.8% 45.2% 45.8% 46.2% 41.3% 45.7% 46.7% 47.0% 44.0% 47.9% 48.7% 49.0% 48.1% 46.5% 44.6% 45.8%
y/y change (bps) (1.04%) (0.65%) (1.29%) (3.14%) (0.64%) (1.94%) (1.29%) (3.54%) 0.47% 0.92% 0.82% 2.70% (0.48%) 0.82% 0.29% (0.95%) (1.61%) (1.91%) 1.27%
SG&A 42.5% 45.8% 33.9% 32.1% 44.6% 46.2% 35.4% 40.4% 49.0% 51.8% 39.0% 40.9% 36.5% 37.4% 37.6% 37.8% 37.8% 41.2% 44.4%
leverage/(deleverage) 0.94% (1.49%) 0.60% 0.72% (2.01%) (0.43%) (1.51%) (8.26%) (4.39%) (5.58%) (3.55%) (0.50%) 0.80% (0.83%) (0.18%) (0.22%) 0.01% (3.44%) (3.22%)
EBIT Margin 3.3% 1.9% 13.5% 12.7% 0.7% (0.4%) 10.7% 0.9% (3.3%) (5.1%) 8.0% 3.1% 11.4% 11.4% 11.5% 10.3% 8.7% 3.4% 1.4%
Other income 0.3% (0.3%) (0.1%) (0.1%) 0.2% (0.3%) (0.1%) (0.1%) (0.1%) (0.1%) (0.1%) (0.1%) (0.3%) (0.2%) (0.2%) (0.2%) (0.1%) (0.0%) (0.1%)
Taxes 42.0% 40.5% 32.6% 33.2% 199.4% 20.6% 28.7% 90.0% 25.3% 25.3% 25.3% 25.3% 37.7% 38.2% 39.2% 39.9% 33.9% 34.0% 25.3%
Net Income 1.8% 0.6% 8.7% 8.0% (0.2%) (1.1%) 7.1% 0.0% (3.1%) (4.5%) 5.5% 1.8% 6.7% 6.9% 6.7% 5.9% 5.4% 1.7% 0.5%
Grow th Analysis
Revenue
Apparel 20.0% 18.9% 18.0% 7.4% 7.3% 11.1% (8.0%) 3.0% (2.0%) (5.0%) 4.0% 3.0% 23.5% 27.2% 30.0% 22.2% 15.3% 1.9% 0.5%
Footw ear 64.2% 58.0% 42.1% 36.4% 2.0% (2.4%) 2.2% 2.0% 3.0% 3.0% 5.0% 5.0% 31.5% 25.1% 44.2% 57.3% 49.5% 1.0% 4.0%
Accessories 26.2% 21.3% 17.6% 7.4% 11.8% 21.7% 1.4% 3.0% 4.0% 2.0% 5.0% 4.0% 25.3% 30.3% 27.4% 26.0% 17.2% 8.9% 3.7%
Total Net Sales 29.6% 27.2% 22.0% 11.7% 6.3% 8.8% (5.2%) 2.8% (0.2%) (2.4%) 4.3% 3.4% 24.7% 27.2% 31.7% 27.6% 21.5% 2.3% 1.6%
Licensing revenues 14.7% 16.0% 21.3% 20.4% 24.6% 19.5% 16.4% 15.0% 13.0% 13.0% 13.0% 13.0% 22.5% 22.8% 22.3% 25.3% 18.6% 18.2% 13.0%
Connected Fitness 119.4% 73.3% 39.8% 7.6% 2.3% (2.2%) 15.9% 20.0% 5.0% 5.0% 5.0% 5.0% - - - 177.8% 50.6% 8.4% 5.0%
Total Net Revenue 30.2% 27.7% 22.2% 11.7% 6.6% 8.7% (4.5%) 3.4% 0.1% (1.8%) 4.5% 3.7% 24.6% 27.1% 32.3% 28.5% 21.8% 2.8% 1.9%
Gross Profit Dollars 27.3% 26.0% 19.0% 4.4% 5.2% 4.3% (7.1%) (4.8%) 1.2% 0.1% 6.4% 10.5% 23.4% 29.3% 33.0% 26.0% 17.7% (1.4%) 4.8%
Gross Profit Dollars ex-licensing revs 27.9% 26.5% 18.9% 3.7% 4.3% 3.6% (8.1%) (5.8%) 0.6% (0.6%) 6.0% 10.3% 23.4% 29.6% 33.6% 26.0% 17.7% (2.3%) 4.4%
SG&A 27.4% 32.0% 20.1% 9.3% 11.7% 9.8% (0.2%) 30.0% 10.0% 10.0% 15.0% 5.0% 21.9% 30.0% 32.9% 29.2% 21.8% 12.2% 9.9%
EBIT 26.1% (39.3%) 16.3% (6.1%) (78.4%) (124.7%) (24.2%) (92.3%) (583.0%) 1038.8% (22.1%) 244.1% 28.2% 27.0% 33.5% 15.4% 2.9% (60.4%) (57.4%)
Net Income 63.5% (57.0%) 27.6% (0.7%) (111.8%) (294.0%) (22.0%) (99.7%) 1425.5% 291.4% (19.6%) 8924.0% 32.8% 29.4% 30.1% 11.8% 11.2% (66.9%) (73.1%)
EPS 62.1% (57.3%) 26.5% (1.8%) (112.0%) (295.1%) (22.4%) (99.7%) 1425.5% 292.4% (19.6%) 8924.0% 31.2% 28.3% 27.9% 10.5% 10.2% (66.8%) (73.1%)
Source: Company reports, Canaccord Genuity research. A more detailed financial model, including balance sheet, income statement, and cash flow projections, if available, may be obtained by contacting your Canaccord Genuity Sales Person or the Authoring Analyst, whose contact
information appears on the front page of this report.

2
Sell unchanged Target Price US$8.00 unchanged | 26 January 2018 Lifestyle Brands and Retailers 3
Under Armour
Estimates Revised

Appendix: Important Disclosures


Analyst Certification
Each authoring analyst of Canaccord Genuity whose name appears on the front page of this research hereby certifies that (i) the
recommendations and opinions expressed in this research accurately reflect the authoring analyst’s personal, independent and
objective views about any and all of the designated investments or relevant issuers discussed herein that are within such authoring
analyst’s coverage universe and (ii) no part of the authoring analyst’s compensation was, is, or will be, directly or indirectly, related to the
specific recommendations or views expressed by the authoring analyst in the research.
Analysts employed outside the US are not registered as research analysts with FINRA. These analysts may not be associated persons of
Canaccord Genuity Inc. and therefore may not be subject to the FINRA Rule 2241 and NYSE Rule 472 restrictions on communications
with a subject company, public appearances and trading securities held by a research analyst account.
Sector Coverage
Individuals identified as “Sector Coverage” cover a subject company’s industry in the identified jurisdiction, but are not authoring
analysts of the report.

Investment Recommendation
Date and time of first dissemination: January 26, 2018, 07:53 ET
Date and time of production: January 26, 2018, 07:54 ET
Target Price / Valuation Methodology:
Under Armour - UAA
Our $8 price target is a blend of 55x our 2018 EPS estimate, 30x EV/EBITDA, and DCF.
Nike - NKE
Our $60 PT is a blend of 25x 2019E EPS, 16x EBITDA, and DCF.
Risks to achieving Target Price / Valuation:
Under Armour - UAA
Principal risks to our SELL thesis include: 1) sales materially improve faster than we are anticipating in 2018, which would reduce the
expense deleverage we are modeling. Accelerated innovation could drive faster-than-anticipated sales growth; 2) the company reduces
its fixed expenses faster than we anticipate next year, thus protecting margins to a greater degree; 3) a take-out offer is made by a
strategic or financial buyer.
Nike - NKE
The following risks to our thesis could impact our estimates and therefore our price target: 1. We believe the primary risk to our thesis is
a deceleration of top-line growth characterized by a sharp deceleration of demand for key running and/or basketball product. We believe
NKE's P/E multiple is predicated on the continuation of robust sales growth and thus any perceived or actual slowdown in top-line trends
would likely result in multiple compression. 2. Another risk includes any unforeseen supply chain issues that could lead to gross margin
contraction and/or order cancellations. 3. Increasing competition from Under Armour and Adidas also poses a risk.

Distribution of Ratings:
Global Stock Ratings (as of 01/26/18)
Rating Coverage Universe IB Clients
# % %
Buy 569 60.40% 41.12%
Hold 253 26.86% 28.85%
Sell 21 2.23% 14.29%
Speculative Buy 99 10.51% 64.65%
942* 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.

Sell unchanged Target Price US$8.00 unchanged | 26 January 2018 Lifestyle Brands and Retailers 4
Under Armour
Estimates Revised

“Risk-adjusted return” refers to the expected return in relation to the amount of risk associated with the designated investment or the
relevant issuer.
Risk Qualifier
SPECULATIVE: Stocks bear significantly higher risk that typically cannot be valued by normal fundamental criteria. Investments in the
stock may result in material loss.
12-Month Recommendation History (as of date same as the Global Stock Ratings table)
A list of all the recommendations on any issuer under coverage that was disseminated during the preceding 12-month period
may be obtained at the following website (provided as a hyperlink if this report is being read electronically) http://disclosures-
mar.canaccordgenuity.com/EN/Pages/default.aspx

Required Company-Specific Disclosures (as of date of this publication)


Canaccord Genuity or one or more of its affiliated companies is a market maker or liquidity provider in the securities of Under Armour or
in any related derivatives.
Canaccord Genuity or one or more of its affiliated companies is a market maker or liquidity provider in the securities of Nike or in any
related derivatives.
Canaccord Genuity or one or more of its affiliated companies intend to seek or expect to receive compensation for Investment Banking
services from Nike in the next three months.
An analyst has visited the material operations of Under Armour and Nike. No payment was received for the related travel costs.

Under Armour Rating History as of 01/25/2018


B:$93.00 B:$97.00 B:$105.00 B:$130.00 B:$65.00 B:$44.00 H:$20.00 H:$21.00 H:$18.00 H:$15.00 S:$8.00
02/03/15 02/05/15 07/23/15 10/14/15 04/18/16 10/25/16 01/31/17 04/27/17 08/01/17 10/12/17 11/01/17

$140

$120

$100
$80

$60

$40
$20

$0
Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Jan 18

Closing Price Price Target

Buy (B); Speculative Buy (SB); Sell (S); Hold (H); Suspended (SU); Under Review (UR); Restricted (RE); Not Rated (NR)

Nike Rating History as of 01/25/2018


H:$46.50 H:$48.00 H:$54.00 H:$54.50 H:$59.50 H:$61.50 H:$66.00 H:$57.00 H:$56.00 H:$52.00 H:$51.00 H:$50.00 H:$64.00 H:$62.00 H:$60.00
03/18/15 03/20/15 06/25/15 09/22/15 09/25/15 10/15/15 12/21/15 03/23/16 06/29/16 09/23/16 10/13/16 09/26/17 12/18/17 12/22/17 01/07/18

$70

$60

$50

$40

$30

$20
Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Jan 18

Closing Price Price Target

Buy (B); Speculative Buy (SB); Sell (S); Hold (H); Suspended (SU); Under Review (UR); Restricted (RE); Not Rated (NR)

Past performance

Sell unchanged Target Price US$8.00 unchanged | 26 January 2018 Lifestyle Brands and Retailers 5
Under Armour
Estimates Revised

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refers to actual past performance, and that past performance is not a reliable indicator of future price and/or performance.
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Short-Term Trade Ideas


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Sell unchanged Target Price US$8.00 unchanged | 26 January 2018 Lifestyle Brands and Retailers 7
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Estimates Revised

this report can contact Canaccord Genuity (Hong Kong) Limited. (Contact Tel: +852 3919 2561) in respect of any matters arising from, or
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Sell unchanged Target Price US$8.00 unchanged | 26 January 2018 Lifestyle Brands and Retailers 8