Athletic apparel maker Under Armour Inc (NYSE:UAA, NYSE:UA) has had a tough few months. The firm’s most recent earnings report showed that the company’s margins declined significantly and management’s forward guidance for UAA stock was lackluster.
Still, there was somewhat of a silver lining for the stock, as the firm’s growth prospects in the athleisure market and connected fitness look promising. However, UA CEO Kevin Plank’s most recent public-relations snare adds to a growing list of reasons investors should be cautious about the company.
Under Armour Faces Several Problems
UA stock is operating in a very competitive environment against well-established players like Nike Inc (NYSE:NKE) and Adidas AG (ADR) (OTCMKTS:ADDYY). While it’s true that UA has some exciting things happening when it comes to connected fitness gear, Under Armour still has a long way to go before its high-tech gear makes a real impact on its bottom line.
Last year, connected fitness ventures contributed just under 2% of the firm’s revenue, so investors are buying into a company that is mostly dependent on athletic apparel and footwear at the moment.
Another reason UA is a risky play is the company’s financial results. Under Armour saw its inventory increase by 17% in the final quarter of 2016 and its margins shrunk considerably. This is problematic looking forward, because Under Armour will need to find ways to sell off that excess inventory.
That will likely mean slashing prices, which will continue to shrink margins in the year ahead.
To make matters worse, UA stock is trading a quite a premium, with a price-to-earnings ratio of 44. Since the company is unlikely to see earnings growth of more than 4% or 5% this year, such a high P/E makes UA an expensive buy in the athletic apparel market.
Plank Sinking the UA Stock Ship
There is certainly an argument for buying UA stock, especially considering shares have gotten nearly 50% cheaper over the past six months. However, the main reason to steer clear at present is CEO Kevin Plank’s most recent decision to insert himself into perhaps the most polarizing presidential election in US history. Plank came out in support of Donald Trump this week, saying that Trump was “a real asset to this country.”
As you might expect, there were many who disagreed with Plank’s sentiments — namely some of UA’s biggest endorsers. Then, in an effort to mitigate the damage, Plank took out a full page ad in the Baltimore Sun to defend Under Armour’s values. The problem with all of this is that the divisiveness of this year’s election has created some very strong feelings on both sides of the debate. A company like Under Armour, which is already under a lot of pressure, does not want to alienate a particular segment of the population by taking a side, so the firm would have done better to stay neutral.
The issue with Plank’s political commentary is that it was reckless. UA needs every sale it can get at the moment, and participating in politics is not a good way to gain customers.
The Bottom Line
UA stock will probably turn itself around at some point, but this year is unlikely to be the time. The firm is facing too many headwinds and Plank’s thoughtlessness suggests management may not be focusing on the right things. Right now, investors would be wise to avoid Under Armour until the company proves it can hack it against giants like NKE and its connected fitness business starts to make up a larger portion of the firm’s revenue.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
