S&P Global Ratings has revised its outlook for Under Armour from stable to positive, citing high demand for its products, reduced promotional pricing and abnormally high cash balances. Indicating that they may be raised over the next 12 months, the agency affirmed its debt ratings for the company on the assumption that its debt/Ebitda ratio will remain below 3 times and that its financial policy will not become more aggressive. Its financial leverage is currently estimated at just below one time Ebitda, with a cash balance of $1.7 billion, and S&P sees it moderating to near 2 times over the next 12 months.
Standard & Poor’s said its revised outlook “reflects our view that the pandemic has accelerated Under Armour’s pricing strategy to boost its brand image,” particularly in North America, by putting less inventory into the system, due in part to logistics constraints. The company’s inventories remained stable in 2020 and declined by 9 percent in 2021.
The agency also mentioned that the sector “recovered faster than we originally anticipated because consumers quickly shifted their spending to products from services and away from activities after the initial lockdown shock.” Still, it doesn’t forecast a continuation of the favorable trends seen in 2021.
As previously reported, Under Armour’s sales grew by 27 percent in 2021, including a 40.8 percent jump in EMEA. S&P is projecting a low-single-digit expansion in the company’s overall revenues, mostly due to higher sales outside North America. “It is hard to assess whether Under Armour can sustain its growth levels in North America,” said the agency, but it added: “Given the company’s lower price point relative to that of its leading peers, we believe it has a greater ability to take pricing to offset inflation than its stronger peers.”
According to S&P, Under Armour’s profitability will contract by about three percentage points in 2023 due to elevated logistics and workforce costs. It should decline to the mid-teens area, but it will likely become less volatile than before. “We apply a negative one-notch comparable rating analysis modifier to reflect the risks around the sustainability of Under Armour’s credit metrics because it has a large cash balance that will likely decline over the next fiscal year and lacks an external guided financial policy,” the agency concluded.
