Investors Should Steer Clear of Under Armour Inc Stock

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UA stock - Investors Should Steer Clear of Under Armour Inc Stock

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“I don’t do retail.”

Those are the words of my father, who has never invested in retail stocks. Neither have I, but particularly when it comes to clothing, I run from retail like it is death — because it is. I can’t tell you how many clothing retail stocks roar onto the market, fly to the moon, and then crash and never recover.

Why? Because consumer tastes can change on a dime. This is exactly what is happening at Under Armour Inc (NYSE:UAA, NYSE:UA) and I want to show you why so you steer clear of retail like the Meyers family. In case you missed it, the UA stock price was down some 50% in 2016, and the company’s most recent earnings report was a dumpster fire. 

Going the Wrong Way

The top-line results for retailers are often where you will see the first sign of problems. After many quarters of double-digit growth, growth will inevitably slow. And that’s the time to get out, because it will get worse.

In the third quarter of 2017, Under Armour revenues dropped 5% to $1.39 billion. Wholesale got whacked by 13%, undoing the 15% increase in consumer sales. Yet consumer sales account for only some 30% of total revenues.

In North America, Under Armour’s revenues dropped 12%, so North Americans were obviously burnt out on the product. Ah, but international revenues increased 34%. That’s also not surprising. As a company rolls out internationally, it will witness fast growth in that area at first.

You can see just how difficult it is to deal with fickle consumers based on the last decade. UA management really wanted to drive for women, as the demographics support that approach, and 2015 saw women’s purchases increase 40%. Yet after Q3, Under Armour’s CEO Kevin Plank admitted that the sales approach for women was not working as well as he wanted it to.

Because consumers are fickle. A company cannot guess trends. Not only that, once designs are decided upon, it takes as much as nine months to get them to the floor. By then, trends may have changed, or a million other variables may have altered.

So it should come as no surprise that gross margins fell by 120 basis points, to 46.3%. Gross profit declined 8%, and that $50 million pretty much wiped out UA’s operating profit. Then, net income fell almost 23% to $100 million.

But there’s more bad news. With retail, a company should see inventory increases or declines aligned with the change in revenue. Yet, while revenue only fell 5%, inventories jumped 22%.

None of this mentions the competition for UA stock from the likes of the majestic Nike Inc (NYSE:NKE). Nike is entrenched in this space and can maneuver its designs and trends far more quickly.

Bottom Line on UA Stock

If you own UA stock, you need to get out. Just sell it. If it means taking a loss, take it. It you are somehow sitting on a gain, grab it. I simply do not see how UA gets out from under this mess.

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 23 years’ experience in the stock market and has written more than 1,800 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.


Article printed from InvestorPlace Media, https://investorplace.com/2018/01/steer-clear-under-armour-ua-stock/.

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