It’s been a decidedly tough year for athletic apparel makers, and despite making several strategic moves to set itself up for the future, Under Armour Inc (NYSE:UA, NYSE:UAA) was no exception.
UAA stock is down nearly 30% on the year, and the firm’s Class C shares have lost a whopping 40% in 2016.
Looking at those figures, you might think you were dealing with a company that has very little hope for the future, but in fact Under Armour appears to have a relatively bright future, making it a good buy at its current valuation.
What Happened to UA Stock
A few key events led to UA stock’s declines over the past year, but the majority of them are unlikely to keep shares of Under Armour depressed for long.
In early December, Under Armour’s ticker symbol changed and that contributed to the decline in the stock price as investors shied away from the company due to confusion over which shares were which and questions regarding management’s decision to have three separate share classes.
Back in April, UA introduced a new C class of stock with the ticker symbol UA.C. These shares had all the same economic value as the A class shares, but shareholders would have no voting rights. CEO Kevin Plank also created a third class of B stock that does carry voting rights, but only he holds these shares. Essentially what the stock split did was allow UA to issue new stock without Plank giving up his majority stake in the company.
If this wasn’t confusing enough, Under Armour then renamed it’s class C shares to just “UA” rather than “UA.C,” and the A shares (which used to be named “UA”) became “UAA” at the beginning of December.
While it was a contributing factor, confusion wasn’t the entire reason that UA stock tumbled this year. Under Armour also faced some pretty worrying headwinds that caused investors to second guess whether the company could remain relevant in the years to come.
Perhaps the most worrying event was the bankruptcy and closure of Sports Authority, which hit UA hard because the distributor was Under Armour’s largest seller. Sports Authority’s troubles hurt UA’s bottom line and weighed on investor sentiment. Many pointed to the bankruptcy as a sign of things to come within the sector.
Finally, despite a third-quarter earnings-beat, Under Armour’s results were less than perfect. The firm’s margins declined and third-quarter sales growth was at a six-year low. Fourth-quarter guidance suggested that the final quarter’s sales growth would be even slower as well.
Why You Should Buy UA Stock
With three major events contributing to UA and UAA stock’s decline in 2016, there’s a lot of reason to believe that things are looking bright for the new year. Even without considering all the things that UA has done to set itself up for a profitable future, UA stock is poised to gain.
UA’s losses resulting from investor confusion over the stock split and new ticker symbols are unlikely to have a lasting impact. As the confusion begins to fade, UA stock will stabilize.
This is especially true for the C class shares, which are a great buy as they are trading at a discount. The voting rights that make A shares more valuable are negligible for traders, as Plank has majority control no matter what, so C shares are a good buy for investors who see UA improving in the coming year.
The Sports Authority closure was certainly a blow to UA’s momentum, but it doesn’t signal an athletic-wear apocalypse as many traders feared. It’s worrying, but other similar retailers like Dicks Sporting Goods Inc (NYSE:DKS) are still thriving, so it isn’t time to panic about the industry’s stability just yet.
UA’s sales issues are also a concern, but the company isn’t in danger of falling apart, so a few difficult quarters shouldn’t be reason to write UA stock off completely. Sales have improved by at least 20% every quarter for nearly a decade, and that is a pretty positive sign of stability.
Better Days Ahead for UA
Once you’ve addressed the three biggest reasons UA stock is down in the dumps, the case for a marked increase in the next year looks promising. Not only are some of the market’s worries about Under Armour overdone, but the firm has also made some strategic moves this year that have put it in a good position for 2017.
One of the biggest moves the company made this year was stepping into the athleisure market. Athletic wear has made it’s way into the closets of just about everyone whether or not they’ve ever set foot in the gym. Under Armour’s product line has always been aimed at athletes with clothing that is designed for performance rather than style.
However, the firm recently unveiled a new line of apparel that focuses on casual athletic wear for the masses. This is a segment that is likely to continue growing in the coming year, so it’s promising to see UA throwing its hat in the athleisure ring. This push into casual-wear is likely to be supported by Under Armour’s new partnership with Kohl’s Corporation (NYSE:KSS), another big factor to watch in the coming year.
The Bottom Line
UA stock is a buy for investors looking to add to their portfolio in the coming year. The stock’s major decline in 2016 has been the result of the market’s overreaction to some challenges that the company is facing.
Not only can investors expect much of that downside to fade in the coming year, but UA’s latest foray into casual wear is likely to give the stock a further boost.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
