Athletic apparel maker Under Armour Inc (NYSE:UAA, NYSE:UA) has seen its share price drop over 30% since the beginning of the year as worries about the firm’s growth potential and profitability drove investors away. There is some potential for UA stock with the company’s connected fitness initiative and athleisure efforts, but the firm is still facing far too many headwinds to make Under Armour a good bet.
UA Stock Is Losing Ground
There was a time when Under Armour was grabbing marketshare away from big-time competitors like Nike Inc (NYSE:NKE), but now that UA has become one of the largest athletic brands in the country, Under Armour appears to be doing more losing than gaining.
Last quarter, UA’s North American sales fell by 1%. Overall, UA’s sales rose 7%, largely due to strong international growth. While it’s important that the firm expands outside the U.S., a sales slide in North America is a big deal for Under Armour because that’s the firm’s bread and butter. Some 80% of UA sales are in the company’s home market.
The sales slide was exacerbated by other issues suggesting that Under Armour is losing touch with what consumers want.
A Piper Jaffray survey showed that teens in the U.S. are responding to both Nike and Adidas AG (ADR) (OTCMKTS:ADDYY), but that Under Armour is losing relevance.
Under Armour’s Sneaker Situation
Perhaps the most troubling thing about UA stock at the moment is the company’s sneaker sales.
As I mentioned back in February, Under Armour is operating in a massively competitive environment. Not only is the retail sector under pressure, but bumping up against major players like Nike that have been seated at the top for years is a tricky situation. In order to really compete with the big boys, UA needs a solid footwear line, something the firm has been lacking.
UA has made big bets on footwear in recent quarters, but those investments have yet to pay off. The firm’s most recent results showed that footwear sales grew just 2% — that’s after the firm paid big bucks to sign on NBA star Stephen Curry and released a collection under his name.
The shoes fell flat with consumers, and their lackluster sales suggest that UA still has a long way to go before it will be able to truly compete with Nike and Adidas.
Some Silver Lining
It’s not all doom and gloom for UA stock. The company does have some exciting prospects, especially in the connected fitness space. However, the trouble with betting on connected fitness initiatives is that they aren’t a meaningful part of Under Armour’s business just yet.
With a price-to-earnings ratio of 45.5, UA stock is expensive. The firm clearly hasn’t ironed out the details of its footwear business, and while connected fitness is certainly a great growth opportunity, the firm has yet to really make waves in the space. Such a high P/E suggests that the firm is going to be turning out impressive earnings, and while that may be the case for Under Armour in a year or two, I’d say the share price has further to fall before it becomes a buy.
The Bottom Line
UA stock is expensive for what it is. The company is facing too many headwinds at the moment to make it a solid investment. Although the firm’s potential in the connected fitness space is exciting, I’d say the sneaker business is more important in terms of long-term growth and profitability. Once UA proves it can compete with footwear, the company will be on a much smoother path.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
