Chalk another up to the danger of earnings season. Under Armour Inc (NYSE:UA) shares have tumbled more than 18% after releasing third-quarter results last Tuesday. The top- and bottom-line results were strong, but a cautious tone regarding the fourth quarter and beyond sent investors running for the hills.
We’ll start with the good news. Earnings of 29 cents a share were up from last year’s 23 cents a share and beat Wall Street’s estimates of 25 cents.
Sales also came in better than expected, climbing 22% to $1.47 billion. Revenue in the year-ago period was $1.2 billion and analysts were looking for $1.46 billion. The solid numbers were the result of increased demand for the company’s apparel (up 18% to $1.02 billion), shoes and accessories.
But that’s pretty much where the strength ends. Gross margins fell to 47.5% from 48.8% last year and management expects another 0.8% decline in the fourth quarter. And over the next couple of years, gross margins are estimated to be relatively flat.
Growth in the North American apparel business is expected to slow, and revenue here in the fourth quarter is expected to increase 20% compared to estimates of 22.2%. That growth rate will likely continue over the next two years, and while still solid it would mark the slowest pace since 2009.
What Under Armour (UA) Has to Do
According to CFO Chip Molloy, the next few years will be focused on investments for the future, specifically in areas Under Armour can grow the fastest. That includes footwear, international and direct-to-consumer. And CEO Kevin Plank called out three key areas the company needs to focus on: “getting big fast, making retail a core competence and getting more shoes on feet.”
You may notice that the footwear segment was mentioned twice there. In fact, that was one area of the business that performed better than expected in the third quarter and it’s the segment I’m keeping the closest watch on. A turn here could signal an opportunity to get back in the stock after growth has dramatically slipped over the past three quarters:
| UA Footwear Growth | |
| Q1 | +64.2% |
| Q2 | +58% |
| Q3 | +42% |
Here’s what I think is happening: Under Armour is suffering a classic mid-life crisis where the founder drinks too much of the adulation. Plank has rearranged the company in a way that preserves his power, making it harder to reason with him and brings his role much closer to that of a monarch than a CEO.
When things are going great, schemes don’t matter. But when the wheels start coming off and the CEO of an athletic wear and sneaker company wants to make whiskey, the red flags go up, and sadly, the stock must come down. I love the cast of endorsers here, but Steph Curry can’t overcome an ugly sneaker design.
The recent weakness sent UA crashing through longer-term support and it is now sitting precariously above $30. The inability to hold here could mean another double-digit move lower.
So there is a chance UA becomes oversold and makes for a good short-term trade. But for a longer-term portfolio, I need to see the fundamentals turn around. For now, the risks outweigh the rewards.
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