August has not been kind to the athletic retail world. Going down with it is Under Armour Inc (NYSE:UAA) stock, which is down more than 1.5% today and roughly 13% over the past month.
The woes all started on Aug. 21, when Dick’s Sporting Goods Inc (NYSE:DKS) reported miserable second-quarter results. Comparable sales were basically flat, despite peer sports retailer bankruptcies which should have acted as a revenue tailwind. Consequently, guidance was cut in a big way.
The news was particularly troubling for Under Armour. UAA stock has historically had a pretty healthy and large partnership with DKS. That partnership, though, has been under stress recently, and as Dick’s looks to navigate in this particularly challenging retail environment, Under Armour could stand to lose shelf space to private-label brands.
Bad news. But then bad news turned into worse news when Foot Locker, Inc. (NYSE:FL) reported equally ugly results on Aug. 18. Comparable sales fell much more than expected and gross margins got killed.
And then the news turned worse yet on Aug. 21 as downgrades rained down. According to the Street, Adidas AG (ADR) (OTCMKTS:ADDYY) and Lululemon Athletica inc. (NASDAQ:LULU) are rapidly stealing market share from Under Armour and Nike Inc (NYSE:NKE).
Jeffries downgraded Nike stock on Aug. 21. Their research suggests that Adidas continues to steal market share. Adidas gaining market share naturally has negative implications for Under Armour as well.
Meanwhile, Bank of America Merrill Lynch upgraded Lululemon. They said that LULU is also stealing market share from Under Armour and Nike. According to BAML, Nike and Under Armour are suffering from “lack of innovation, over-distribution in moderate channels, and heavy promotions.”
Put it all together, and you get a UAA stock which is dropping like a rock. The stock is now down 42% year-to-date.
I am bullish on buying the dip in athletic retail. But not UAA stock.
Here’s why.
Buy Dips in Athletic Retail (In General)
Athletic brands sold off as if the whole athletic apparel sector is dying, but that’s irrational.
I’ve already come out and said buy Nike stock on this dip. Athletic apparel remains hot despite sports retailer weakness. Brands like Under Armour, Nike, Lululemon, Adidas and Skechers USA Inc (NYSE:SKX) all reported robust growth last quarter. But sports retailers all put up pretty ugly numbers, and the reason for the disconnect has nothing to do with the popularity of athletic apparel.
Instead, it has everything to do with a seismic shift in athletic retail right now from wholesale to direct-to-consumer. Nike, Skechers and Under Armour are all emphasizing a direct-to-consumer sales approach. That means pushing the digital channel and more aggressively rolling out their own branded retail stores.
All this means that sports retail partners, like Dick’s and Foot Locker, get squeezed.
So in general, the recent sell-off in athletic retail brands like Nike, Skechers and Adidas should be bought. Athletic retail remains hot; just not at traditional retail locations like Dick’s and Foot Locker. Growth is happening at Nike, Skechers and Adidas-branded stores, as well as through the e-commerce channel.
But Not in Under Armour
But don’t rush in and buy all of the athletic apparel designers. Under Armour should still be avoided for one major reason: valuation.
Here is how UAA stock stacks up with its peers in terms of valuation and growth prospects over the next two years.
UAA stock is trading at 37.6 times fiscal 2018 earnings for high-single-digit to low-double-digit revenue growth and about flattish earnings growth. NKE stock is trading at 19.2 times fiscal 2018 earnings for mid-to-high single-digit revenue growth and mid-single-digit earnings growth. SKX stock is trading at 13.8 times fiscal 2018 earnings for low double-digit revenue growth and low double-digit earnings growth. And LULU stock is trading at 22.7 times fiscal 2018 earnings for high single-digit to low double-digit revenue growth and low double-digit earnings growth.
Bottom Line on UAA Stock
The broad athletic retail sell-off was dramatically overdone. The real opportunity rests in athletic apparel designers, because the market is mistaking wholesale weakness for weakness across the whole sector.
Looking at the numbers, NKE, SKX and LULU look like solid buys at these levels.
But not UAA stock. It sports a far bigger multiple than its peers for modestly larger topline growth and essentially muted bottom-line growth.
As of this writing, Luke Lango was long NKE, SKX, DKS and FL.
