Shares of Under Armour (NYSE:UAA) have been range-bound between $15 and $25 for the past twelve months, as good and bad catalysts have largely offset one another. Bulls are hoping this range-bound trading will end in 2019, and that UAA stock will break out towards $30 as revenue growth and margin expansion come together to power robust profit growth.
The reality is that robust profit growth will happen in 2019, but it won’t spark a breakout rally in UAA stock.
Why? Valuation. This is a classic case of a fully valued stock treading water until the fundamentals catch up to the valuation. In late 2017 and early 2018, investors bid up UAA stock in anticipation of a big turnaround as revenue growth and margins started to stabilize. But they bid the stock up to levels that were fundamentally stretched. As such, ever since that big rally, UAA stock has been stuck in a sideways trading range as the fundamentals have tried to catch up.
Because the Under Armour turnaround is progressing at a snail’s pace, those fundamentals won’t fully catch up until 2020 or 2021. As such, investors shouldn’t expect UAA stock to break out of its $15-to-$25 trading range in 2019. That won’t happen for another twelve months.
The Fundamentals Aren’t Great for UAA Stock
In the big picture, the athletic apparel space is expanding thanks to secular trends, such as the convergence of athletic and casual styles, and a global consumer pivot towards being healthier and more active. But, in that space, Under Armour is losing relevance, share and popularity because they’ve failed to capitalize on these trends.
Namely, as Nike (NYSE:NKE), Adidas (OTCMKTS:ADDYY) and Lululemon (NASDAQ:LULU) have turned into lifestyle brands that sell clothes which people wear to work out and hang out, Under Armour hasn’t. Instead, Under Armour has doubled down on performance, and entirely missed the boat on the lifestyle pivot.
As such, Under Armour has mitigated exposure to the lifestyle growth niche within the athletic apparel category, which is where most of the growth is today. That’s why Nike, Lululemon and Adidas are all growing at high single digit-plus growth rates, while Under Armour is struggling to maintain narrowly positive revenue growth.
These struggles will continue. It will be tough for Under Armour to pivot into lifestyle. Nike, Adidas, and Lululemon collectively dominate the lion’s share of this market. Plus, upstart brands like Gymshark are also gaining share.
In other words, the lifestyle side of this market is very crowded. There really isn’t room for Under Armour.
To be sure, that doesn’t mean the Under Armour brand is dead. There’s still growth potential on the performance side of the athletic apparel market, especially in the footwear segment. Under Armour will be able to grow in those verticals. But, growth will be greatly limited because of its lack exposure to the lifestyle side of the market.
As such, the turnaround fundamentals underlying UAA stock aren’t all that great.
Valuation Is Still Stretched
Because Under Armour’s turnaround fundamentals aren’t all that great, the Under Armour turnaround has progressed at a snail’s pace.
In 2016, Under Armour’s revenue growth rate was 23%. In 2017, it dropped sharply to 3%. Then, in 2018, it rebounded only marginally to 4%. Meanwhile, North America revenue growth rate dropped from 16% in 2016, to -5% in 2017, and rebounded only slightly to -2% in 2018. Gross margins dropped more than 100 basis points in 2017, and rebounded only 30 basis points in 2018.
In other words, the trend here is very clear. Under Armour’s growth trends fell off a cliff in 2017 and rebounded very slowly in 2018.
This snail’s pace rebound is expected to continue next year. Revenue growth is projected to be roughly 3%-4%. North America revenue growth is expected to be flat. Gross margins are expected to rise 70 basis points.
All in all, because of Under Armour’s lack of exposure to the high-growth lifestyle segment of the athletic apparel market, the UAA turnaround is progressing slowly. At 63-times forward earnings, UAA stock needs more than a slow turnaround to breakout of its sideways trading range.
Here are the numbers. Going forward, Under Armour is likely a mid-single-digit revenue grower with room for gross margin expansion to ~48% and opex leverage to ~11%. If that happens, Under Armour could reasonably hit $1.50 in EPS by fiscal 2025. Based on a Nike-average 25 forward multiple, that implies a reasonable fiscal 2024 price target for UAA stock of $37.50. Using a 10% discount rate, that means prices above $25 aren’t fundamentally supported until fiscal 2020.
Bottom Line on UAA Stock
Under Armour isn’t a bad company, it’s just one that failed to pivot into an area it needed to pivot into in order to keep shares on an uptrend. As such, UAA stock has been stuck in neutral over the past several quarters as slowly improving fundamentals have tried to catch up to a stretched valuation.
This dynamic will persist for the foreseeable future. Indeed, fundamentals say that UAA stock won’t break out of its $15 to $25 trading range until 2020.
As of this writing, Luke Lango was long NKE.