Leave Under Armour Inc (UAA) Stock for Dead

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As far as I’m concerned, Under Armour Inc (NYSE:UAA) has one major thing going for it: brand name. Beyond that, I see no difference between UAA products and those of any other sportswear provider. You can make a lot of different arguments, but when it comes to sportswear, it’s a commodity business, and commodity businesses are only distinguished by brand and marketing.

Leave Under Armour Inc (UAA) Stock for Dead?

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That’s why I never invest in clothing retailers. Because when a company like UAA reports earnings like it did recently, it becomes terribly apparent how quickly things can turn south — and that’s despite having a year that resulted in both record revenue and earnings.

The question now is whether UAA stock is a value play or should be left for dead.

UAA Stock Numbers

There is some good news. The top line is doing pretty well. For Q4, revenues rose about 12% to $1.3 billion, including a 23% pop in direct-to-consumer sales. UAA is booming internationally, where revenues increased 55%, and footwear worldwide grew 36%.

For the full year, revenue increases were even more impressive, up 22% overall, with international up 63%, and virtually every category showing double-digit increases in revenues.

That’s all well and good, were UAA stock a stalwart stock — but it isn’t. It’s considered a growth stock, and 12% revenue growth doesn’t impress, especially after guiding Wall Street to 20% growth. Oops.

While I highlighted the places where revenues were doing well, I didn’t mention that arena where they stink — North America clothing, particularly workout clothing. Which takes us back to commodities. Just about anything you can get in that category at UAA can be had at other retailers for 40%-50% less.

One of the other problems lies in the margins. Q4 gross margins fell from 48% to 44.8% YOY. Even though SG&A expenses fell 70bps as a percent of revenues, the net margins fell to 8% from 9%. For the year, net margins fell to 5.4% from 5.9%. Net income increased to $258.6 million from $232.6 million, up about 12%.

Margins are tight enough as it is in clothing retail, and getting clocked to the tune of 320bps is not inspiring — and neither is the CFO resigning “for personal reasons.”

Nor can investors be pleased by the cash flow situation. In fiscal year 2015, operating cash flow was negative $44 million, and free cash flow ended up negative $343 million. Well, Under Armour managed $304 million in operating cash flow for FY16, but capex continued apace, and so free cash flow ended up negative $12 million.

It’s not that cash is a problem — Under Armour has $250 million in cash. It’s just that cash flow should not be negative at this point in company history.

The Future for Under Armour

As for where UAA stock goes from here, you have to look at the $9.2 billion market cap – which is 35x FY16 earnings — and get the heck out of Dodge. Look, if you can sustain 20% revenue growth and 20% net income growth, I’ll pay 35x earnings. But if you are guiding to 20% revenue growth, come in at 12%, along with 12% net income growth, and show margins getting squeezed like this, I’m not going to go near you.

One has to ask if the jig is now up for UAA stock. I can’t stand it when anybody compares UAA to Nike Inc (NYSE:NKE). The two companies may effectively sell the same merchandise, but NKE has decades on Under Armour and a worldwide operation and brand name, not to mention footprint. Heck, I’d sooner buy NKE at 22x earnings while growing its net income at 12%-15%.

Under Armour can only play catch-up to Nike, and that’s not a position I want to be in.

Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/02/under-armour-inc-uaa-stock-dead/.

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