When it comes to high growth stocks, Under Armour Inc (NYSE:UA, NYSE:UAA) was one of the best over the last few years. As it battled Nike Inc (NYSE:NKE) for sporting goods supremacy, UA’s brand of technical fabrics, shoes and gear managed to strike a nerve with both professional and casual athletes alike. As a result, UA stock managed to produce an average annual return of 53.5% between 2009 through 2015.
And then, it seems that Under Armour forgot to “protect its house.’’
UA stock spent much of 2016 in a freefall and it was one of the worst performing major stocks out there. The real tragic thing is that many of the catalysts that pushed Under Armor down haven’t subsided.
For investors, the high-growth days at UA may finally be over.
The Numerous Factors Hurting UA Stock
The tail-end of 2016 wasn’t kind for Under Armour stock. By the time the calendar rolled over to 2017, UA had lost a whopping 29% and it had the distinction of being one of the worst performers in the S&P 500. How it got there is a tale of slowing sales growth, looking overseas to shoes for its livelihood.
The sour song for Under Armour stock begins at its sales growth or rather the pace of that growth. UA stock is considered a classic “growth” stock and the pace of its revenue growth has been incredibly swift. The firm managed to grow its total revenue base from about $1.5 billion back in 2011 to more than $5 billion per year during 2015; Under Armour increased its revenues in each of the last 26 quarters.
But even for the most high-growth firms, eventually, size starts to chip away at that torrid growth.
Last quarter, UA only saw its revenues rise by 22%. While still an enviable jump in sales, it represented the slowest increase in six years. What was worse is that it was lower than the previous quarter’s 28% increase in sales. Which was in turn, lower than the previous 30% jump in sales. Annually, revenue growth showed a similar pattern of lower and then lower.
That’s a troubling sign for any growth stock, but it’s especially troubling for one trading at a price-to-earnings ratio of 41-plus.
And it doesn’t look like those sales will significantly rebound back anytime soon. Retail as a whole is hurting, but sports retail is particularly in the doghouse. The recent bankruptcies at Sports Authority and Eastern Mountain Supplies are prime examples of the fickle nature of the business. Fellow InvestorPlace contributor Will Ashworth points out just how over-saturated we are with sporting goods stores. The figure isn’t pretty and fires a major warning shot across UA’s bow.
Sales could be worse for Under Armour had it not gone on an international holiday.
UA has been making up for lost revenues in the U.S. with a hefty dose of overseas sales. International sales at Under Armour increased a staggering 74% and accounted for 15% of its total revenue picture last quarter. The problem here is the rising dollar. The U.S. market for sporting goods is clearly hitting its peak. But given the dollar’s strength, UA hasn’t exactly been hitting it out of the park when it comes to profits. If it’s forced to continue tapping the global scene for sales, earnings are going to suffer in a big way.
Perhaps even more so, when you consider what Under Armour is selling to drive those profits.
Shoes are incredibly low-margined items and represent one of the major “commodities” in the apparel world. For Under Armour, footwear has become it’s primary sales driver. The issue here is that low margins coupled with the massive expenses required to secure top talent to its brand drives margins even thinner.
To combat that, most athletic shoe companies use ultra-cheap foreign labor to cut costs. And we all know who is against international trade deals and is for border taxes. And considering that Trump just ended the Trans-Pacific Partnership and has vowed to move jobs back from overseas, UA’s profits could really sink. The next four years maybe pretty problematic for Under Armour.
Under Armour Is Still Just a Clothing Company
With its growth starting to decline, it’s time to state the obvious: UA is just a clothing company. It’s all that it ever was. Sure, it had cool fabrics and a great selection of gear, but its just selling t-shirts and sneakers. That’s something investor in Under Armour stock need to keep telling themselves.
Under that scenario, UA stock is very expensive when looking its declining sales and troubled margins.
This isn’t a call to short the firm’s shares, but a healthy reminder that when growth is gone, so are the gains. We’ve already had round one of that with Under Armour. But given the headwinds, we could see round two as investors realize that UA is now on a level playing field with the rest of the retail industry.
In the end, that could mean another troubled year for the stock.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
