Baltimore, MD-based athletic apparel and footwear company Under Armour Inc. (UAA) saw its shares skyrocket as much as 25% on Tuesday following better than expected earnings in Q3 2018. As results ease investors' concerns regarding an inventory glut and a growth deceleration, some bulls on the Street see more room to run for the stock, already up over 61% YTD versus the S&P 500's modest 1.8% rise in 2018. 

Sportswear Co. Says Q3 Shows Its 'Playbook Is Working'

Under Armour posted adjusted third-quarter earnings that more than doubled the consensus estimate, driving shares to their largest gain in a decade. Meanwhile, gross margins rose to 46%, higher than expected in its multi-year turnaround plan. Revenue deceleration in North America, down 2%, was offset by strength overseas. 

Our playbook is working,” said Under Armour Chief Operating Officer Patrik Frisk on the company's earnings call. “We’re focused on managing the business for sustainable, long-term profitability.”

After Under Armour fell from all time highs of $55 in 2015 to a low of $11.40 in 2017, management designated last year as a "reset year," wherein the "athleisure" maker stopped selling 40% of its products to double down on its most popular lines. Cost cutting focused on eliminating pricey professional sponsorships and licensing deals, as well as trimming its global workforce. Under Armour management assured investors that benefits of the restructuring would start to pay off in the second half of 2018. Recent earnings helped confirm this promise to patient investors, as well as a handful of analyst on the Street who offered upbeat outlooks following the results. 

Bulls Confident on Improved Margins, Inventory

“We have been noting a clear focus on recovering margin and focusing on the health of the business, and with inventory clean, and gross margin up, we believe the company is doing just that,” Nomura Instinet analyst Simeon Siegel reported in a note on Tuesday. “However, we have also been flagging this focus on margin would likely come at the expense of meaningful top-line growth, which appears to be happening as well.”

Analysts at Cowen lifted their price target on Under Armour stock from $18 to $21, highlighting confidence on "gross margin and free cash flow outlook into next year.

Baird's Jonathan Kamp, who rates the sportswear maker at "outperform" with a 12-month price forecast at $27, added the stock to the investment firm's "Fresh Pick" list. 

Bears Warn on Overheated Stock

Not everyone on the Street is as bullish, however. In an note to clients on Tuesday, Raymond James analyst Dan Wewer wrote that "we do not see any evidence that UAA is returning to above-average growth that can support its lofty valuation." 

CFRA analyst Camilla Yanushevsky echoed this sentiment, downgrading shares to sell from hold and writing that UAA is "overvalued at current levels." 

Bloomberg Intelligence analyst Chen Grazutis also flagged negative data points including slowing international growth, a decline in footwear sales and a flat direct-to-consumer business.

“On an operational level the company is doing a great job reducing promotions and controlling costs,” said Grazutis. “That said, future growth including 4Q performance will depend on acceleration in international markets and the footwear segment, and these look a lot more uncertain than a few months ago.”

Moving forward, investors will keep a close eye on the progress of Under Armour's transition, which is largely unfinished and still leaves much up in the air, while looking out for updates from the company's investor day slated for Dec 12.