Shares of Under Armour (NYSE:UAA) rose sharply on Tuesday after the athletic apparel company reported healthy fourth-quarter numbers which topped revenue and profit expectations. UAA stock price rose 10% on the day and is already giving back some of those gains this morning.
UAA stock is now up more than 80% since bottoming out around $12 in late 2017. Some bulls are pounding on the table and saying recent numbers underscore that this big Under Armour turnaround is only halfway done.
The numbers actually say otherwise. At its core, Under Armour is an athletic apparel company with staying power in the secular growth athletic apparel industry. But the company is also losing relevance and popularity within that industry. The competition is only getting bigger and better, and Under Armour isn’t adapting quickly enough. As such, this will remain a slow revenue growth company with depressed margins for the foreseeable future.
At $22, Under Armour stock is fully priced considering that bleak reality. Potential upside into the end of the year looks limited, and this rally (much like previous rallies towards $25) will likely end with a big drop toward $20.
That’s a drop worth buying. Until then, the best thing to do with UAA stock is stay away as it closes in on $25.
Under Armour’s Numbers Weren’t That Good
Bulls want to rally around the headline Q4 double beat. But, underneath that headline, there were some serious problems with Under Armour’s numbers in the quarter. Those problems include:
- Revenue growth was just 3% in the quarter, 4% for the year, and expected to be 3.5% next year. Those aren’t very strong growth rates, especially for a company with broad exposure to the rapidly growing athletic apparel space. They also don’t scream “big turnaround is coming”. Instead, with revenue growth set to cool next year, they actually imply that this turnaround is on its last legs.
- North America revenues dropped 6% in the quarter. That ends a multi-quarter streak of North America business stabilization, and implies that this business will continue to struggle for the foreseeable future.
- While gross margins are expected to rise by 70 basis points next year, the operating profit guide implies less than 70 basis points of expansion on the operating margin line. That’s a big hit on the long-term margin expansion narrative, since without falling opex rates, it will be tough for gross margin expansion alone to drive operating margins materially higher in the long run.
Overall, while Under Armour’s Q4 numbers and fiscal 2019 guide weren’t bad, they weren’t good either. If anything, they indicate that this company is stabilizing, but that the big turnaround has already happened.
Fundamentals Limit Upside
The model for Under Armour isn’t terribly hard.
The athletic apparel market globally is growing at a steady 7% annualized rate. Under Armour, a sub-5% revenue growth company, is losing share in that market, and will continue to lose share given the company’s inability to transform into a lifestyle brand and penetrate the athleisure market at scale. As such, Under Armour will remain a sub-5% revenue growth company for the foreseeable future.
Gross margins will continue to trend higher as the company pushes DTC sales and gets product back into full price distribution channels. But, the lack of opex leverage expected in 2019 is problematic. Opex rates will fall over time. But, not by that much since revenue growth won’t be that big. Thus, we are talking slight gross margin expansion and slight opex leverage for the foreseeable future.
Overall, Under Armour can probably continue to grow revenues by 4-5%, and improve operating margins to 10% by fiscal 2024.
Under those assumptions, $1.30 in EPS seems achievable by fiscal 2024. Based on a Nike (NYSE:NKE) average 25 forward multiple, that equates to a 2023 price target of $32.50. Discounted back by 10% per year, that equates to a fiscal 2019 price target for UAA stock of about $22.
Thus, as UAA stock closes in on $25, upside into the end of the year looks limited.
Bottom Line on UAA Stock
Under Armour is a fine company in a great industry. But, the stock price currently reflects optimism that things will get better. They won’t. At best, Under Armour defends its position, and operations stabilize. At worst, competition continues to eat away at Under Armour, and things get worse.
Consequently, this current rally towards $25 will — much like prior rallies to $25 — ultimately end in disappointment for bulls.
As of this writing, Luke Lango was long NKE.
