Athletic apparel maker Under Armour Inc (NYSE:UA, NYSE: UAA) had a difficult run in 2016, and so far this year, things haven’t been looking much better. Over the last six months, UA stock has declined 29% as investors abandoned the firm due to a worrying third-quarter earnings report and overall weakness in the athletic apparel industry.
While it’s true that UA’s most recent earnings report showed falling margins and management cut its forward guidance substantially, investors that discarded UA stock are focused on just a small piece of the puzzle rather than looking at the larger picture.
However, this decline has made for a good buying opportunity for long-term investors as Under Armour stock is likely to deliver solid gains in the year to come.
UA Stock: Priorities Are in Order
While UA’s third-quarter results were less than ideal, they aren’t reason to dump the stock as many investors did. In fact, the so-called disastrous report is a good indication that management is thinking long-term. UA CFO Chip Molloy said it best when he noted that “Growth, share, and scale are the priorities.” While this has cut down on short-term profitability, Under Armour is investing heavily in growing its businesses which could set the firm up to become an athletic apparel giant like Nike Inc (NYSE:NKE).
One of the ways UA is planning to expand is through sport fashion apparel. Athletic clothing has become a staple in closets of Americans, whether they actually work out or not. In the past, Under Armour marketed its products to athletes by boasting state-of-the-art fabrics and performance enhancing styles, but last year was the first time the firm stepped into fashion.
UA unveiled a new line of casual athletic wear last year and the company is partnering with discount department store Kohl’s Corporation (NYSE:KSS), which will help the company reach the athleisure target market with its new line.
It’s Not All Bad for Under Armour
While UA’s declining margins and lowered guidance stuck out as the headline for the firm’s third-quarter earnings, it’s important to note that the company still posted sales growth of more than 20%.
Perhaps investors overlooked this detail because UA stock has been posting sales growth of more than 20% every three months for the past 26 quarters, but that’s a big reason to remain positive on Under Armour stock. UA’s ability to grow its sales consistently despite poor macroeconomic conditions, difficulty within the athletic apparel industry and the closure of one of its main distributors speaks volumes about the company’s strength.
For investors that are willing to wait out the storm, UA stock is a good buy. Currently, the firm’s class C shares, are heavily discounted at just $25 per share. Many see Under Armour growing into a behemoth like NKE eventually, and that projection isn’t unfounded. At the moment, UAA is working to expand its clothing and footwear lines both internationally and throughout the US.
The firm is also dabbling in fitness tracking and connected clothing, a segment that has a lot of potential to grow in the coming years. If you believe in UA stock’s potential to become a top-of-class athletic apparel retailer, $25 per share is a steal.
The Bottom Line for UA
Under Armour has a bright future, but it isn’t without its problems. The firm had a rough 2016, but its ability to continue growing its sales despite a challenging environment is a good reason to overlook the negativity and take a long-term position in UA stock.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.