I learned a lot about the stock market from my father. He taught me the basics of what stocks and bonds are, and I’ll always remember one of his steadfast rules: “I don’t do retail”. When one looks at the fortunes of retailers in general, but specifically clothing retail stocks like Under Armour, Inc. (NYSE:UA, NYSE:UAA), you know why my father speaks wisdom.
The problem with clothing retail stocks like UAA stock comes down to one fundamental issue: either consumers dig a company’s style or they don’t.
The rub is that this problem becomes exponentially more complex, because consumers may dig a style for a certain period of time, and then stop digging it for no obvious reason whatsoever. Or because another retailer decides to copy the style but offer it for lower prices. Or because a retailer decides to go with a dark color or tone scheme for the autumn, only to find that consumers inexplicably have fallen in love with pastels for October.
Or maybe consumers just decide the products offered by Under Armour or any other retailer simply aren’t … well, fill in the blank.
The Problem With Under Armour Stock
This problem is unique to retail, whether it be clothing or furniture or sneakers. For the most part, every other product in every other sector relies on functionality more than style. This style component means that fickle consumers can torpedo a company’s fortunes without warning, on a whim.
You can see this in both UAA stock earnings, but also in the semiannual Piper Jaffrey report called “Taking Stock with Teens”. The top brand losing relevance? Under Armour. Not only that, Under Armour fell out of the top ten in both footwear and apparel choice, and held the dubious top spot as the brand most upper-income males have stopped wearing.
Look at this quote from CEO Kevin Plank in an analyst call last quarter: “We need to become more fashion. The consumer wants it all. They want product that looks great, that wears great, that you can wear at night with a pair of jeans, but that also does perform for them.”
Who wants to chase that? For that matter, who wants to own UAA stock where its success depends on the ability of management to guess at totally random things like style preference?
Bottom Line on UAA Stock
This takes us to the fact that Under Armour stock reports earnings this week. The last two reports were disasters that cratered UAA stock, which is down more than 50% over the past year. Yet despite this fall, the company has trailing twelve month net income of only $198 million, and a market cap of over $8 billion. Even at FY17 earnings of $0.52 per share, why would anyone want to pay 40x earnings for a stock in its present state of affairs.
Look, growth from $0.42 per share to $0.52 per share YOY is a 24% increase. That’s fantastic. As a growth stock, paying 40x earnings isn’t necessarily unreasonable, but not considering how bad the last two reports have been and with the Jaffrey report that brand interest is declining.
So I expect the stock to take a hit next week. Aggressive speculators may want to consider shorting ahead of the report. The question then may be whether UAA stock becomes a value play.
I don’t think it is. The reason is that, for me, value plays have some advantage that the market overlooks or doesn’t care about. With Under Armour stock, the underlying financials are deteriorating. FY14 saw free cash flow of $79 million. Yet in FY15, not only was operating cash flow negative, but free cash flow came in at negative $342 million. Last year, free cash flow was negative $82 million.
Stay away from UAA stock.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
