Under Armour Inc (NYSE:UA) is set for a flat to lower day on Tuesday after reporting earnings that apparently disappointed some folks. But make no mistake: UA stock still looks as good as it ever has.
As far as the Under Armour earnings report is concerned: Revenue came in at $1 billion, up 28% from the $784 million in the year-ago period. However, traders decided the earnings were a little light, down 39% to $19 million.
The reason was a $39 million impairment charge on the bankruptcy of the Sports Authority chain — almost certainly a one-time event. Gross profits were actually up 25%, and UA reported gross margins of nearly 48%. The company is expecting to bring in $4.925 billion in revenue for the year.
Investors might have a bargain here.
Under Armour has been an outstanding performer for years, and since the controversial April UA stock split, meant to maintain the control of founder and CEO Kevin Plank, shares are up another 6%.
The stock split came in the form of a dividend called “C” shares, which lack voting rights. The prediction was they would trade at a substantial discount and indeed, the C shares (NYSE:UA.C) shares trade for 12% below those of the regular shares, a discount that has been increasing over the last month.
Quality vs. Quantity
Under Armour is always compared with rival Nike Inc (NYSE:NKE), which is eight times bigger and decades older. Those comparisons have become louder in recent years as Under Armour’s growth rate has continued to exceed that of its larger rival. Those who pound the table for NKE point to the fact that it pays a dividend, unlike Under Armour, and that it created the whole “athleisure” trend, in which people wear athletic apparel on the street.
Instead of paying many athletes to endorse its products, Under Armour signs a smaller number for big dollars and delivers products athletes actually use for people who aren’t athletes. These include the Golden State Warriors’ Steph Curry, the New England Patriots’ Tom Brady, Washington Nationals player Brian Harper and star golfer Jordan Speith.
Critics feel this makes it vulnerable to the stars’ performance — that Curry’s failure to win the NBA title, or Brady’s four-game suspension over “Deflategate,” translates into slower sales. But that’s not what happens. Whether golfer Jordan Speith misses a putt, or former wrestler Dwayne Johnson’s latest movie tanks at the box office, it means less to Under Armour sales than whether they remain in the public eye and avoid personal scandal.
So far, UA has been fortunate.
The Lulu Rumors
In recent years, Plank also has been dogged by questions about whether he might buy Lululemon Athletica Inc. (NASDAQ:LULU), the maker of yoga apparel. Lululemon sources products directly and sells them in its own stores, while Under Armour, like Nike, uses traditional retail distribution channels.
The rumors peaked last year but the time to strike was probably after Lululemon’s 2013 scandal that resulted in the departure of its own founder-CEO, Chip Wilson. Since then Under Armour has generally outperformed Lululemon and the two companies sell at comparable multiples to earnings. An acquisition at this point would be dilutive to UA earnings.
The Real Risk to UA Stock
The real risk to Under Armour stock is the age and health of Plank, the company’s answer to Nike legend Phil Knight, who retired last month. And of course, Plank is 43, in excellent shape and seems destined to stay at the helm for decades, especially now that his position is secured by the stock split.
To me, that says investors with a multiyear time horizon should see any fall in UA stock, for any reason, as a time to buy.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn.