Shares of athletic apparel brand Under Armour (NYSE:UAA) dropped on Wednesday after Dick’s Sporting Goods (NYSE:DKS) pointed to weakness with the Under Armour brand in its second-quarter earnings report. UAA stock dropped to $20 on the news.
Bulls aren’t surprised by this. Under Armour is expanding its distribution channel. Specifically, they are pouring more product into low-price channels like Kohl’s (NYSE:KSS) and less product into full-price channels like Dick’s. Naturally, then, Dick’s sales of Under Armour apparel will be weak. This isn’t a surprise, nor is it anything to worry about.
At least that’s what the UAA bulls think.
But, I’m not in that camp. I don’t think Under Armour’s weakness at Dick’s is a one-off event. The Under Armour brand is weak pretty much everywhere outside of Kohl’s, and that isn’t a good thing. It means Under Armour’s presence is strengthening in an off-price, low-margin channel, and weakening everywhere else. That combination doesn’t bode well for revenue or earnings growth going forward.
As such, I don’t think there is any reason to own UAA stock here and now. It isn’t terribly overvalued. But, upside potential looks limited considering persistent brand weakness.
The Under Armour Brand Remains Weak
Under Armour’s day in the sun was back in 2014-15 when the company paired up with NBA superstar Stephen Curry and rode on the coattails of Curry’s success to huge market share gains.
But that day is over. Now, the reality is that Under Armour brand is the weakest in the athletic retail space, and recent moves into Kohl’s only weaken an already depressed brand perception.
North America sales growth went from 30% and up a few years back to declines in a hurry. Sales growth isn’t roaring back into the picture, either. Last quarter, North America revenues rose just 1% in constant currency.
Search interest trends imply that this weakness remains today. Google search interest related to Under Armour in the United States started dropping in 2017 and continue to be weak today. Meanwhile, global search interest, which plateaued in 2017, is now down in 2018, implying that the international business is following in the footsteps of the North America business and quickly losing relevance.
Further, while Nike (NYSE:NKE) and Adidas (OTCMKTS:ADDYY) dominate Piper Jaffray’s list of the most popular clothing and footwear brands among U.S. teens, Under Armour is nowhere to be found. It was actually highlighted last year as one of the brand’s most rapidly losing relevance, and those mind-share declines among U.S. teens have persisted this year.
Overall, the Under Armour brand remains weak. So long as this remains true, UAA stock is a tough buy.
Under Armour Stock Doesn’t Look Great
You don’t need much growth to support UAA stock at $20.
I reasonably think revenues can rise by roughly 5% per year over the next five years, and operating margins can bounce back to 7.5%. Under those assumptions, it is reasonable to think that Under Armour can net $1.50 in earnings per share in five years. A Nike-average multiple of 20X forward earnings on $1.50 implies a four-year forward price target of $30. Discounted back by 10% per year, that equates to a year-end price target of roughly $22.
Thus, UAA stock doesn’t look terribly overvalued here and now.
But, even 5% revenue growth and mild margin expansion might be tough for this company so long as the brand remains weak. If international sales growth comes off the rails and North America revenue growth slips back into negative territory, then 5% long-term sales growth is overly optimistic, and a year-end price target of $22 will prove too high.
As such, UAA stock doesn’t look great here. The valuation isn’t unreasonable, but there are ton of risks which challenge the upside thesis and make the stock a tough buy here and now.
Bottom Line on UAA Stock
At these levels, UAA stock isn’t a winner or a loser. The valuation isn’t unreasonable, but the narrative is still pretty bad. That combination should lead to a stock stuck in neutral.
As of this writing, Luke Lango was long DKS.