Under Armour's cleaning up its biggest problem

  • Under Armour has been cleaning up its inventory problem, according to Jefferies analyst Randal Konik. 
  • The clean-up could add material value to its bottom line. 
  • Under Armour has been losing ground to other players in athletic apparel over the last few years. 
  • Watch Under Armour trade in real time here. 

Under Armour is finally figuring out how to correct an issue that has been a thorn in its side for quite some time, and that could mean significant growth ahead for the company. 

The athletic-apparel retailer is slimming down its inventory levels, which will in turn fatten up its margins, Jefferies analyst Randal Konik wrote in a note to clients. 

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"Under Armour fundamentals are poised to inflect, with the top line accelerating and margin erosion lessening, supported by progressively cleaner inventory," Konik said.

The retailer has been pressured by an inventory backlog that started in the second half of 2017 when the company was having issues getting its inventory to out on time. That led to a 22% year-over-year jump in inventory during the third-quarter of 2017. And that remained the case through the first-quarter 2018, before Konik noticed a change. 

"While we acknowledge that inventory was elevated exiting first-quarter, we believe it continues to get cleaner," he said.

Dick's Sporting Goods, one of Under Armour's most important retailers, suggested on its first-quarter conference call that it was seeing inventory changes take shape.

"The majority of the inventory has been cleaned up," Dick's Chairman and CEO Edward Stack said on the call. "We're really pleased with the content and the direction we're going to be going with them going forward.

Konik says, "This should help mitigate the margin pressure going foward and presents upward bias to Street estimates."  

This is a welcomed turn of events for Under Armour, which has had a difficult ride over the past several years. Shares plunged 80% from mid-2015 to mid-2017 as other players having been gaining market share in the athletic-wear market.

Most recently, Puma passed Under Armour to become  number three in market share, and New Balance is nipping on its heels for fourth, according to research from Wedbush Securities. 

Under Armour is up 59.6% this year. 

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