“Protect this house,” the corporate slogan of Under Armour Inc (NYSE:UAA) for many years, is likely being screamed today by fearful investors heading for the exits. UAA stock is getting shellacked in Tuesday’s premarket session, plunging more than 25% to around $18.88.
The reason? The athletic apparel giant completely whiffed on its fourth-quarter 2016 earnings results.
Ahead of the quarter, UAA stock — down some 27% in six months and near 52-week lows — was punished due to weak revenue and profits margins. Investors who bought Under Armour solely on the appeal of the cheap price are now getting kicked in the teeth.
Is it an overreaction? Let’s go through the numbers.
Under Armour Q4 Earnings
In the three months ended in December, the Baltimore-based company posted adjusted earnings per share of 23 cents, below analysts’ projections of 25 cents per share. Revenue came in at $1.3 billion, also missing Street forecast $1.4 billion.
Aside from the top- and bottom-line misses, what really spooked investors was Under Armour’s meager guidance. For fiscal 2017, UAA forecasts net revenues to rise in the range of 11% to 12% to around $5.4 billion. Analysts surveyed by FactSet, however, were looking for full-year revenue of $6.1 billion. The company brought down estimates for operating income down to $320 million and weaker gross margin.
“Numerous challenges and disruptions in North American retail tempered our fourth quarter results,” said CEO Kevin Plank in a statement.
Although Plank didn’t mention what these specific disruptions were, it’s no secret that the company’s business have gotten hurt not only by increased competition from Nike Inc (NYSE:NKE) and Adidas AG (ADR) (OTCMKTS:ADDYY), but also due to last year’s bankruptcy of athletic retailer Sports Authority. And with other department stores such as Macy’s Inc (NYSE:M) — which carries Under Armour products — closing stores, Under Armour’s inventory levels will rise as its distribution channels adjust to shifts in consumers’ spending habits.
If these headwinds weren’t bad enough, Under Armour announced that CFO Chip Molloy has decided to leave the company for personal reasons. The company has appointed David Bergman, senior VP of corporate finance, as acting CFO effective Feb. 3.
All told, Under Armour has invited plenty of uncertainty to UAA stock.
Not only must the company spend more in its own distribution/retail network compete with Nike, it must also convince investors that its increased spending, which CEO Kevin Plank telegraphed in October, will pay off in the long run.
Remarkably, the company must execute these moves with a new CFO and likely a new capital strategy.
Bottom Line for UAA Stock
As with several fast-growing companies, Under Armour has approached a period where growing gets painful. The company understands it must invest on the top line to grow the bottom.
To that end, investors need more patience.
UAA stock is not going to zero, but I don’t recommend buying until the dust settles and a bottom is reached. Expect a few head-fakes in the short-term as traders play with this significant dip.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
