We all know clothing retailers are really struggling. They are stuck having to deal with fickle consumers, whose sudden changes in taste can destroy a brand as quickly as they made it. If you want a reason why I never buy clothing retailers, look no further than Under Armour, Inc. (NYSE:UA). UA stock is down about 60% this year and recent results were a disaster.
The Demise of UA Stock
In the last quarter, UA revenues fell 5% to $1.4 billion. The problems are primarily in wholesale, which fell 13%. Consumer sales were up 15%, but consumer sales only account for about a third of revenue.
Remember what I said about fickle consumers? UA’s North American revenues fell 12%, but international revenues were up 35%. So what is hot and trendy in one area may not be in another.
Now, I want to focus on apparel revenues, which fell 8% to about $940 million. Over the past few years, UA stock had been driven by a focus on women. Management communications over the past ten years always talked about women being the cornerstone of growth. The company cited some impressive statistics: 40% of high school athletes are women; female soccer players had grown by 200% since 2000; almost 60% of competitive runners are women; and the female side of the business was on fire back in 2015, growing at a 40% clip.
In this latest earnings presentation, Under Armour’s CEO Kevin Plank said that women’s clothing was an area the company needed to execute better in. Oops.
With these declines in revenues, gross margin fell 130 basis points, to 46.2%. Gross profit fell 7.5%, and that $53 million shortfall killed operating profit — dropping it 25% after adding back an $85 million restructuring charge. Net income fell to $100 million, down from $128.2 million.
Sitting on the Shelf
Meanwhile, inventories increased 22%. That’s a terrible trend. If revenues are increasing, then inventories increasing to maintain supply is great. But if revenues are falling and inventories are rising, that means there’s stuff sitting in stockrooms.
Particularly troubling is that UA has a lead time of 18 months. This means all that stuff sitting on shelves is like the light from a star that died a zillion years ago. It’s a remnant of a style cycle that is rapidly becoming obsolete.
International growth is all that is keeping UA afloat — and the UA stock price reflects this. For now, that’s OK, but eventually that growth is going to wane.
All of this comes amidst ongoing competition with behemoth Nike, Inc. (NYSE:NKE). NKE has been in this arena much longer and only has 30% of its revenue coming from the US. NKE has the ability to move quicker and be more nimble despite its size, because its lead time is much shorter.
Bottom Line on UA Stock
What should you do with UA stock? If you own it, you need to sell it. If you bought low, lock in the profits, because it’ll only get worse from here. If you are sitting on a loss, throw in the towel. Use the loss to offset any other capital gains you have.
Don’t buy UA stock here. This is not a value play. It needs a turnaround artist to rescue it… and that probably means a lower stock price before anyone gets involved.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at [email protected].