It’s been a rough stretch for Under Armour Inc (NYSE:UAA). Over the past year, UAA stock has been the second-worst performer in the S&P 500, declining 58%. Only struggling Frontier Communications Corp (NASDAQ:FTR) — a highly leveraged play in the declining wireline industry — has fallen further over that period.
Investors should not try and time the bottom in UAA, particularly ahead of the company’s Q1 earnings report later this month. The drivers of the decline in UAA stock haven’t changed — if anything, the pressures on Under Armour have increased.
And it’s not as if shares are cheap, with the stock still trading at 37x 2018 consensus EPS.
At some point, UAA stock might provide a buying opportunity — and it even could be a takeover target down the line. But we’re not there yet, or close. For a number of reasons, Under Armour still has further to fall.
Under Armour’s Branding Problems
Under Armour has long been positioned as the brand of choice for serious — and professional — athletes. That worked well when UAA was an exciting growth story — but not anymore.
Under Armour now needs to expand its reach to different customers and different channels. Doing so will risk that the ‘core’ Under Armour brand will be diluted by efforts to target casual athletes or even fashion customers.
The recent deals to distribute Under Armour products to Kohl’s Corporation (NYSE:KSS) and DSW Inc. (NYSE:DSW) highlight that problem. It’s a tricky path to sell to both moms and kids via those traditional retail channels while also maintaining the aura of exclusivity and performance that used to define Under Armour. And with Kohl’s already discounting Under Armour product, early results suggest that Under Armour’s branding problem isn’t fixed.
Competition and Under Armour
If the stock market is any indication, Under Armour is falling behind badly. While UAA stock is down by more than half over the past year, rivals Nike Inc (NYSE:NKE) is down only modestly and adidas AG (ADR) (OTCMKTS:ADDYY) has risen over 60%.
It’s not a two-horse race any more — and that makes the road ahead even tougher for Under Armour. It means sneakerheads aren’t just choosing between the latest Curry and the latest LeBron. It means there’s more competition for sales in apparel as well.
And it’s not just the ‘big three’ where competition could be an issue. For all its faults, Lululemon Athletica inc. (NASDAQ:LULU) has an entrenched brand in women’s apparel. Smaller wholesale player Delta Apparel, Inc. (NYSEMKT:DLA) has introduced a “Delta Dri” product that is supposed to replicate Under Armour’s wicking and performance benefits.
Again, broadening Under Armour from a high-growth niche player to a brand that spans categories and channels won’t be easy. And there’s little reason to expect the process to get easier soon- – or for competition to get any softer.
UAA Stock Isn’t Cheap
These issues don’t mean that Under Armour sales and/or earnings are going to decline. But even after a nearly 60% decline, UAA stock remains priced for rather significant growth. Under Armour stock still trades at 45x 2017 analyst consensus EPS estimates.
A compression of that multiple back toward the mid-20s levels seen at NKE and ADDYY would value UAA stock near $10.
From a long-term perspective, it’s still possible that Under Armour can grow into that valuation. But from a short-term perspective, there’s little reason to jump into UAA stock given that modest narrowing would pull the stock down substantially.
In other words, expectations are still high for UAA stock and that seems dangerous heading into the Q1 and Q2 earnings reports. Any miss will be punished; any beat still means that UAA requires a ~50x+ earnings multiple to drive significant upside from current levels.
There simply isn’t much, if any, evidence that Under Armour’s growth is going to re-accelerate in the first half. The footwear industry overall hasn’t been particularly impressive, save for Adidas. Early returns from the roll-out at Kohl’s and DSW seem disappointing. Costs remain high and the furor over CEO Kevin Plank’s comments supporting Donald Trump may not yet have subsided.
Stay Away or Stay Short
The risk-reward for UAA stock simply isn’t in investors’ favor at the moment. Even the profitable arbitrage between the prices of the two share classes — UA stock and UAA stock — has narrowed.
Under Armour still has a lot of work to do longer-term; in the near term, there’s little reason to expect an earnings surprise. All told, even after a big decline, it seems likely that things will get worse for UAA stock before they get better.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
