Under Armour (UAA) – Trade Idea

Company Description

Under Armour, Inc. is engaged in the development, marketing and distribution of branded performance apparel, footwear and accessories for men, women and youth. The Company’s segments include North America, consisting of the United States and Canada; Europe, the Middle East and Africa (EMEA); Asia-Pacific; Latin America, and Connected Fitness. Its products are sold across the world and worn by athletes at all levels, from youth to professional, on playing fields around the globe, as well as by consumers with active lifestyles. The Company sells its branded apparel, footwear and accessories in North America through its wholesale and direct to consumer channels. As of December 31, 2016, the Company had approximately 151 factory house stores in North America primarily located in outlet centers throughout the United States. In addition, the Company distributes its products in North America through third-party logistics providers with primary locations in Canada, New Jersey and Florida. Source: Reuters.

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Open Interest

Option Pricing

  • Implied Volatility (expected price movement) for short-dated options is 46%
  • Realized Volatility (historic price movement) for short-dated options is 77%
  • Implied Volatility Percentile for short-dated options is 47%

Trade Idea

What happened?

Under Armour Class A shares are down over 16% after the company confirmed it is the subject of a federal investigation into its accounting practices. What happened?

  • On Sunday, The Wall Street Journal reported that the Justice Department and the Securities and Exchange Commissionare examining the sportswear maker’s revenue recognition practices and whether it shifted sales from quarter to quarter to make them appear stronger. After The Journal published the article, Under Armour said it is cooperating with investigators and that it began responding in July 2017 to requests for documents and information relating primarily to its accounting practices and related disclosures;

  • On the earnings call earlier today, an analyst asked how significant the investigation was and why investors were “just hearing about it now.” Mr. Bergman, a longtime company executive who took over as CFO in February 2017, said the company was prohibited from discussing the matter. “So now we’re focused on 2020 and beyond,” he said. On the same call, Chairman and CEO Kevin Plank didn’t address the matter.

Q3 earnings highlights:

  • For the third quarter, the company reported a profit of $102 million, or 23 cents a share, compared with a profit of $75.3 million, or 17 cents a share, during last year’s third quarter. Analysts had expected a profit of 18 cents per share;

  • Total revenue fell 1% to $1.43 billion in the quarter ended Sept. 30. Analysts expected total sales of $1.41 billion. World-wide, Under Armour’s apparel revenue increased 1%, while footwear sales declined 12%;

  • Under Armour said Monday that sales were flat in the third quarter and it lowered its revenue forecast for the rest of the year, as the company battles to return to the growth levels it once enjoyed;

  • Sales decreased 4% in North America, Under Armour’s biggest market. Nike Inc. and Lululemon Athletica Inc., meanwhile, have been growing sales in North America. Overall, though, profit and sales were better than Wall Streetexpected;

  • The sportswear maker has been struggling with weak sales since 2017. Until then, it had been among the fastest- growing clothing brands, riding 26 straight quarters of at least 20% year-over-year revenue growth;

  • Under Armour said it now expects full-year sales to rise about 2% compared with a prior forecast for 3% to 4% growth. It also expects earnings per share to be at the high end of its previous forecasted range of 33 cents to 34 cents;

  • Last month, the company said Mr. Plank was stepping down as CEO on Jan. 1 after more than 20 years in the role. Mr. Plank plans to stay at the company as executive chairman and brand chief, and Mr. Frisk will take over as CEO and continue reporting to Mr. Plank.

Our thinking:

  • Implied Volatility is elevated on news that the Justice Department and the Securities and Exchange Commission are examining the sportswear maker’s revenue recognition practices and whether it shifted sales from quarter to quarter to make them appear stronger;

  • With volatility in the 47 %-ile, this may be an opportune moment to tactically sell volatility in a low volatility regime. We prefer selling the Weeklys as opposed to longer dated options in order to mitigate any risk pertaining to the outcome of the investigation;

  • It is our aim to capitalize on the fact that dealers widened bid ask spreads in the market and inflated IV in hopes to recoup/ offset losses. Traders could position themselves tactically to provide liquidity at a significant premium. Note that shorter duration does carry greater gamma risk. If you are willing to short volatility (margin required), one could consider a trade structure listed below:
SideQtyExpStrikeType
Sell18 Nov17.5Call
Sell18 Nov17.5Put

PnL Graph

TRADE MANAGEMENT

20 %
Profit Target

Trade Structure Profit Target.

3 D
Time Stop

Close the Trade Structure after 3 calendar days if the Profit Target has not been reached.

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