The Ratings Game: Under Armour upgraded as Deutsche Bank sees benefits of ‘difficult decisions’ made across retail during COVID-19

This post was originally published on this site

Under Armour Inc. UAA, +0.94% was upgraded to buy from hold at Deutsche Bank, part of an apparel sector analysis that found COVID-19 forced some retail and apparel companies to make necessary changes that will ultimately grow business.

Deutsche Bank raised its price target on Under Armour shares to $22 from $15.

Analysts forecast a 40% increase to Under Armour’s margin rate by fiscal 2023 aided by shifts in inventory and pricing, among other factors.

The athletic company is also getting a boost from partnerships with NBA superstar Steph Curry and Dwayne “The Rock” Johnson.

“While Under Armour is still lacking with fashionable sportswear, revenues can still accelerate to a mid-single digit compound annual growth rate (CAGR), in our view, buoyed by a supportive athleisure backdrop, international expansion, and a North America segment that returns to growth after four years of declines,” wrote analysts led by Paul Trussell.

See: Dwayne ‘The Rock’ Johnson partners with Molson Coors for nonalcoholic energy drink

Deutsche Bank notes that Under Armour stock has taken a beating even has other athleisure companies have made gains during the pandemic.

Under Armour shares are down 6.4% over the past year, but have rallied 35.7% over the past three months.

The SPDR S&P Retail ETF XRT, +1.07% is up 60.5%, and the S&P 500 index SPX, +0.23% has gained 16.2% for the period.

Analysts credit a restructuring at Under Armour that is bringing costs in line with the company’s revenue base. Under Armour announced a restructuring plan in February 2020 and continued with its restructuring plan while managing the impact of the coronavirus pandemic.

While COVID-19 has been painful for many parts of the apparel sector, Deutsche Bank says it has forced companies to make necessary changes to their businesses.

“Ultimately, our take is that COVID has been a meaningful positive catalyst for retail margin trajectory as the pandemic forced retailers to make difficult decisions about organizational structure, real estate, and pace of digital investments while also experiencing reduced competition (through bankruptcies and store closures) and an opportunity to reset promotional activity and inventory levels,” analysts said.

Retailers have been able to invest in digital and adjust to shopper behavior, which will drive improved margins, more profitable stores, and other advantages, even if sales are slower to recover.

Also: Poshmark takes inspiration from old-school retail to create an experience for the future

Deutsche Bank also upgraded Michael Kors parent Capri Holdings Ltd. CPRI, +0.69% to buy from hold; department store retailer Dillard’s Inc. DDS, +11.79% was upgraded to hold from sell; and Vans parent VF Corp. VFC, +2.02% was upgraded to buy from hold.

Analysts raised their price target on Capri to $56 from $28. Dillard’s was nearly doubled, up to $60 from $31. And VF Corp.’s price target was raised to $103 from $81.

“Store closures, greater direct-to-consumer penetration, reduced reliance on department stores, aggressive cost savings, AUR [average unit retail] expansion, well-managed inventories, rapid digital growth, and watches no longer a headwind are factors contributing to our increased confidence in the Michael Kors brand,” analysts said.

“Meanwhile, the successful rollout of belts, sneakers, and handbags/other higher margin accessories with new global flagship stores and star studded marketing campaigns could lead Versace to be one of the fastest growing luxury brands in 2021.”

See: Target’s holiday sales show the importance of stores even as COVID-19 drives business online

Dillard’s has lowered the amount of clearance items in its assortment.

And analysts say VF Corp.’s Supreme acquisition and ongoing tailwinds in the outdoor and active categories will drive margins and sales.

“Lean inventories and warmer-than-usual weather may limit upside in the upcoming quarter, but we have increased confidence in the long-term algorithm of double-digit bottom-line growth and mid-teens TSR [total shareholder return] with exciting product innovation and brand collaboration leading to an uptick in demand with those transactions incrementally coming through direct-to-consumer (approaching 50% of sales) and specifically e-commerce (approaching 20%),” Deutsche Bank said.

In addition to the Supreme purchase, analysts note the buzz generated by a collaboration between The North Face and Gucci this month, and the success of a collaboration between the Timberland brand and Capri’s Jimmy Choo label.