Ever since a dicey earnings report in late October, Under Armour Inc (UA) has lost about 27% of its value — but the carnage may not over.
Consider that Morgan Stanley analyst Jay Sole has slashed his price target on Under Armour stock from $103 to $62, which is at a 11% discount to the current value.
OK, so why all the bearishness?
Well, in Sole’s report, he provides several troubling reasons. First off, he believes that UA is suffering from a fall off in market share, marking its first decline in three years. This is based on crunching data from SportsScan, which is composed of both brick-and-mortar and web sales.
Even more worrisome is that that the steepest decline has been in the women’s apparel segment, which has also seen a decline in the average selling prices (the category accounts for roughly 30% of sales).
This has happened despite the fact that UA has been pushing an aggressive marketing campaign, involving stars like Linsey Vonn, Misty Copeland and Gisele Bundchen.
Something else: Sole’s analysis shows that there has been a 20% drop — since the start of 2013 — in the footwear category: “This trend is a major concern because it suggests a fundamental shift in the [Under Armour] story.”
No doubt, a key to the Under Armour stock price has been the company’s premium brand. Yet if the ASPs continue to come under pressure, then this thesis could be dubious.
Now it’s true that some of the deterioration could be from the unusually warm weather in the holiday season, which has likely led to soft sales. But keep in mind that UA has also had to fight tough competition, such as Nike (NKE) and lululemon (LULU). Sole also believes that the company may be “reaching maturity in U.S. apparel faster than previously thought.”
Given all this, is it any wonder that Under Armour stock plunged nearly 7% on the report?
Can Digital Save Under Armour Stock?
Over the past few years, UA has invested heavily in digital technologies, such as with apps and wearables. A critical part of this has been over $700 million in acquisitions of startups like MapMyFitness, Endomondo and MyFitnessPal. The result is that UA has amassed a user base of over 160 million.
And as seen at last week’s Consumer Electronics Show in Vegas, it looks like the efforts are starting to pay off.
The company now has an extensive Connected Fitness product line, which includes UA HealthBox (a digital health system for athletes), UA Band (a tracker for steps, distance, sleep and resting heart rate), UA Scale (a Bluetooth and Wi-Fi enabled scale that measures weight and body fat), UA SpeedForm Gemini 2 Record Equipped (a smart shoe that tracks distance) and UA Headphones Wireless (measures heart rate).
To pull this off, the company has struck relationships with companies like Harmon (HAR), IBM (IBM), SAP (SAP) and HTC.
Yet the impact on Under Armour stock may take some time. After all, the company is projecting about $200 million in revenues from the Connected Fitness division by 2018. However, UA is expected to generate $3.84 billion on the top line for 2015.
In other words, if there is a trailing off in much larger segments like women’s apparel and footwear, the impact could be severe for UA stock. After all, the valuation is at lofty levels, with the forward price-to-earnings ratio is at 52.
So for the time being, the best approach is probably to be patient. With the markets already edgy, there could still be much more downside for UA stock if the growth story starts to lose its luster.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
