- Q2 was a disappointment quarter on the operating income front.
- However, the market seems to have taken this in perspective.
- The stock price only fell by 5% - not what you would normally expect.
Under Armour (NYSE:UA) stock came under huge pressure as the apparel and footwear maker reported second quarter results, but got away lightly.
Quarterly profits fell by 57%, from $14.8 million a year ago to $6.34 million, as profits were deeply impacted by the liquidation of Sports Authority, the largest seller of UA’s products.
Operating income for the quarter dropped 39% to $19 million compared to $32 million last year, mainly due to $23 million impairment charges related to the liquidation.
Under Armour also revised its projected sales growth for the year to 24%, down 2% from the previously expected 26%.
Why the Tepid Market Reaction?
Under normal circumstances, a profit drop of 57% and a downward revision in growth projections, no matter what the root cause is, could have easily caused widespread panic for any company - more so when you are a company trading at more than 50 times forward earnings. The Under Armour stock price only fell by 5.07% after the second quarter results were out.
But Under Armour is not a typical company. They have been growing at double-digit rates for many years, and the company expects that growth to continue in this year and the next.
The market clearly saw the profit drop as an isolated event not capable of affecting the underlying business prospects; and with sales growth continuing unabated, Under Armour escaped with a minor correction in its stock price instead of a huge one. Under Armour now expects third quarter growth of 20% as the company wades through the impact of Sports Authority’s liquidation.
With one of its largest sellers going down, Under Armour had to find new avenues to keep its products flowing out to the market, and the company announced that it will start selling in Kohl’s next year. The Kohl’s tie up also seems to be part of UA’s strategy to keep pushing in the West Coast. Earlier this year UA signed two marketing deals with UCLA and Cal Berkeley athletic programs, expanding their visibility in the area - and Kohl’s has more than 100 stores in the region.
“This decision to reach new consumer through Kohl's is not a channel consideration but a consumer consideration. We want to reach our consumer where they expect to find Under Armour product, and we'll continue to partner with the retailers that provide us the opportunity to showcase the Under Armour brand.”
Moving Forward Into Fiscal 2016
The second half of 2016 will be a bit of a tricky period for Under Armour to cross over since it will lack the support of one of its top sellers. As such, the company has revised its growth estimates to 24%, which will be the lowest level of growth they have achieved since 2009.
Still, 24% is much higher than what most companies of this size are growing at. It clearly shows how much growth potential Under Armour still has left.
Minor shocks such as the operating hit this quarter being brushed away with small corrections to the stock price is understandable, but if you are an investor, do remember this is a hyper-growth stock trading at high forward multiples. The market may not be as forgiving during subsequent earnings calls should UA not deliver on the revised growth numbers.