- Under Armour is on track to achieve its $7.5 billion target in 2018.
- The next two years will see shrunken margins and low ~20% revenue growth.
- It’s a smart move, but investors don’t seem to appreciate the strategy.
Under Armour (NYSE:UA) shares plunged by more than 10% after the company warned about a slowdown in their North American apparel segment during its Q3 earnings call. The damage was done when the company said it will be expecting revenues to grow in the low 20% range in 2017 and 2018, while expecting operating income to grow in the mid-teens as the company doubles down on investments to stimulate growth.
The drop in UA stock price came despite the company beating analyst expectations in the third quarter. Wall Street analysts were expecting a profit of 25 cents per share on $1.46 billion in revenues, while the company reported a profit of 29 cents per share, with revenues of $1.47 billion.
A double-digit growth rate should be more than enough to make any investor happy about the company they have invested in, but when the company is trading well above 3 times the sales, despite dropping a quarter of its value, even small shocks such as this one - which is natural for any company in its business journey - is more than enough to swing the stock in a big way.
Third quarter revenues grew by 22%, much lower than the 28% and 30%, the company recorded in the second and first quarter of the current fiscal, respectively. Operating income increased by 16% compared to the prior period, a clear indication that the company has put the bankruptcy of Sports Authority, which had hurt its operating numbers in the second quarter, behind it.
Slowdown in Sports Apparel
News about the slowdown in the sports apparel market - also called the “athleisure” segment - has been swirling around since the start of this year.
With competition in the United States increasing in the sports apparel segment, prices started going lower and lower, another indication of an impending slowdown in the market. But thankfully, Under Armour is not a one-trick pony, and the company should be able to survive the slowdown due to its interest in other segments, as well as steadily growing exposure in international markets.
Guidance For Fiscal 2016
Under Armour has reiterated the guidance for this year, and is expecting $4.925 billion in net revenues for the year, a growth of 24% compared to 2015. The bigger question that looms now is how much operating margin the company will be able to post in the next two years if it expects sales growth to move a bit slower than in the past.
When companies expect a tight market and are operating in a highly competitive environment, they can either choose to get into price wars to keep things moving, or they can choose to invest heavily in certain focus areas that can take them further down the road. The second choice is a long-term play, while the first one is a short-term fix. Thankfully for investors, Under Armour seems to be getting ready to take the second route, which should help the company in the long run instead of merely keeping analysts happy for the next quarter. And that extra push clearly seems to be on the footwear segment.
CFO Chip Molloy during the third quarter earnings call:
“We are on track to achieve our 2018 revenue goal of $7.5 billion and expect to grow full-year revenues consistently in the low 20%s in both 2017 and 2018. At the same time, we expect annual operating income growth in the mid-teens each of the next two years as we focus on investing to get big fast.”
CEO Kevin Plank during third quarter earnings call:
“Our challenge is that we need to continue investing on multiple fronts, in categories, geographies, and the talent and infrastructure required to capture those growth opportunities and that's why the dollars we are committing reflect a broader investment strategy.”
As such, it looks like it will be a tough two years for Under Armour as they regroup their efforts, put more money into the business and expand to new regions and categories.
The real problem is that with the current high valuation, there’s not much of a margin of safety for investors. Our recommendation is to add to your position over a long period of time, and be prepared to be in this for the long run. Short-term gains aren’t something you’re likely to get with UA stock.