Under Armour Inc (NYSE:UA, NYSE:UAA) has emerged as the biggest threat to Nike Inc’s (NYSE:NKE) seemingly unimpeachable perch atop the sports apparel universe in the past few years. Since that emergence, UA stock has exploded.
But “UA” is no longer Under Armour’s only ticker symbol, and the resulting confusion seems to have turned some investors off.
In April, UA did a 2-for-1 stock split, issuing Class C shares ostensibly as a dividend for shareholders of record, but really so that CEO Kevin Plank could maintain control of the company via new Class B shares, which carry extra voting rights. Google did the exact same thing when it rebranded as Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL).
The C shares traded under the ticker symbol “UA.C,” while the original A shares remained UA stock.
Then, last week, Under Armour made things really confusing. Suddenly, the Class C shares that for a short time had been “UA.C ” became “UA” stock, and what was “UA” stock started trading under an entirely new ticker symbol, “UAA.” Investors haven’t responded well to Under Armour’s game of ticker musical chairs — UA stock is down more than 10% in the week since the ticker changes were announced.
Entering this year, Under Armour was one of the market’s hottest stocks, with an average annual return of 53.5% since 2009. This year, UA stock is down 37% (and UAA stock — the former UA stock — is down 24%).
What’s Really Causing Under Armour’s Problems?
Of course, stock splits and new ticker symbols aren’t solely responsible for UAA’s 24% dropoff in 2016. So, is there some other problem with Under Armour as a company that could be driving down the stock?
Not sales, which have grown at least 20% every quarter since at least 2009, including a 22% jump in the third quarter.
Not earnings — the third quarter was its most profitable quarter in years at $0.29 per share, though earnings-per-share were in negative territory the previous quarter. Both sales and earnings topped consensus analyst expectations in the third quarter, however.
And not in terms of image, having signed high-profile spokespeople such as Stephen Curry, Michael Phelps, Tom Brady, Cam Newton, Jordan Spieth, Clayton Kershaw, Bryce Harper and Lindsey Vonn — to name a few — in recent years.
To consumers, UA has emerged as a cool, hip alternative to Nike and millennials clearly love their shoes, as it saw 42% increase in footwear sales last quarter.
No, to understand Under Armour stock’s non-ticker-related malaise this year, you have to dig a little deeper. For instance, despite the third-quarter earnings beat, Wall Street sold off the stock after the Q3 report because gross margins fell to 47.5% from 48.8% a year ago, third-quarter sales — though higher than expected — still marked a six-year low at 22%, and guidance for fourth-quarter sales growth (20%) was even lower.
Investors punished Under Armour after the underwhelming report, sending UA stock tumbling 23% in a week (aside from that one week, the stock is relatively flat for the year). However, slowing sales growth isn’t exclusive to Under Armour.
The entire sports apparel industry has struggled this year thanks in part to the May shuttering of Sports Authority, a sporting goods chain that accounted for 10% of the sporting goods square footage in the U.S.; it was also one of the top distributors of UA and Nike gear.
Year-to-date, Nike’s stock is down 16.8%, which isn’t much better than UA stock (though Adidas AG (ADR) (OTCMKTS:ADDYY) shares have risen 55% as the company is in the midst of a comeback). Eventually, consumers will adjust to the absence of Sports Authority and find other ways to buy Under Armour apparel.
Bottom Line on UA Stock
Similarly, investors will adjust to Under Armour’s new ticker symbols. And while UA stock isn’t exactly a bargain at 38 times forward estimates, both sales (23.5%) and earnings (22.4%) growth are expected to accelerate next year.
Given the modest fourth-quarter guidance, there may be some more short-term pain ahead for UA stock. Looking at the bigger picture, though, nothing is really wrong with the company.
A confluence of events — the stock split and ticker change confusing investors, the Sports Authority closure, slower sales and smaller margins in the third quarter — have knocked Under Armour from its lofty perch this year. But UA is still the fastest-growing brand in sports apparel, especially in footwear.
Soon, investors will get over the ticker issue and shake off the somewhat disappointing third-quarter results for Under Armour. When it happens, I expect UA stock to keep on, um … ticking.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
