This year started out surprisingly pleasant for the retail sector. After taking a beating for the past few years, retailers started to make a bit of a comeback as their turnaround plans began to take shape and investors started to believe that Amazon.com, Inc. (NASDAQ:AMZN) isn’t the only play in the industry. However, while we’ve watched the likes of Wal-Mart Inc. (NYSE:WMT) rise like a phoenix from the ashes, other retailers, like Under Armour Inc. (NYSE:UA, NYSE:UAA) are still wading around in the mud.
At the beginning of this year, some pointed to UAA stock’s rise as a sign that the company was coming back to life. However, the majority of that lift appeared to come from optimism in the retail sector overall. The company’s future prospects look bleak and Under Armour stock has fallen more than 10% over the past week as investors took profits and readjusted their projections for the stock.
UAA was Expensive for What You Get
Despite the fact that the stock lost a whopping 50% of its value in 2017, it’s not a cheap buy. The firm’s price-to-earnings ratio is 45 and its forward P/E is 46. That’s high for a company that’s expected to deliver lackluster sales figures in its upcoming Q4 earnings report and has very few strategic initiatives that analysts are excited about.
In the third quarter, we saw revenue at UAA decline and management said it expects to see single digit growth for the full year. What’s worse is that the majority of that “growth” has come from discounting.
Under Armour has had to lean on promotions in order to move its goods, and that has had a negative effect on the firm’s margins.
Power Struggle at Under Armour
The problem that Under Armour is facing right now is that the firm is losing its pricing power. Consumers are finding it easier and easier to swap out UAA goods for competitors’ products. That means that not only will Under Armour struggle to raise prices, but the firm is being forced to lower its prices through promotional activity just to keep people interested.
That’s a worrying trend for investors and makes UAA stock’s future look very uncertain.
To make matters worse, UAA’s turnaround efforts are further damaging its brand image.
Under Armour saw some of its distributors fall victim to the Amazon effect and eventually shutter their stores. So in an effort to replace them, the company struck up deals with discount retailers like Kohl’s Corporation (NYSE:KSS) and Famous Footwear.
At first glance, the deals make sense — new distributors and a wider audience — but as the analysts at Susquehanna Financial Group pointed out, the discount stores have had a poor impact on the company’s overall image. Not only does selling UAA goods in discount stores hurt the brand image for consumers, but it will likely cause some of its higher-tier retailers like Dicks Sporting Goods Inc. (NYSE:DKX) to reduce the quantity of UAA goods they stock as well.
The bottom line is that UAA is suffering from an image problem that has hurt sales significantly, but unfortunately the company’s solution to that problem has only chipped away further at its brand name.
Competition Is Fierce
To make matters worse, UAA is competing with the likes of Nike Inc (NYSE:NKE) which has both time and money on its side. NKE has proven that it has staying power over the past few decades and the firm’s 104.7 billion market cap dwarfs UAA’s 6.1 billion.
Not only that, but Nike appears to be making smarter business decisions that UAA to cope with the changing retail landscape. NKE brokered a deal to sell some of its apparel on Amazon in order to cope with the closure of many sporting goods stores, a move that will likely help the Nike brand rather than harm it.
The Bottom Line
UAA stock is a dud. The company has done very little to inspire confidence in the firm’s future, and the plans it has made appear to be driving the firm deeper into a ditch.
The retail space is a scary place to be and it takes a lot to prove your worth to investors these days. UAA simply hasn’t done that and the firm’s upcoming earnings report is likely to take the stock even lower at the end of January.
For now, I’d swear clear of UAA stock.
As of this writing Laura Hoy was long AMZN.