I’ve long been a skeptic of Under Armour (NYSE:UA,UAA) stock — and, of late, the market has disagreed. Under Armour stock took a hit in December, with the rest of the market. But the more expensive UAA stock has rallied 26% so far in 2019 and now trades at almost double late-2017 lows.
As confusing as the odd and seemingly permanent valuation gap between UA and UAA stock is, the market’s patience is equally perplexing. UAA stock plunged after disappointing five-year targets were disclosed at the December Investor Day. The market seems to have forgotten all about that. Fourth-quarter earnings were not impressive — but Under Armour stock gained regardless.
Now, one of Under Armour’s key customers has said the brand is in trouble. And while that customer sees hope, that news alone should drive further skepticism that Under Armour can grow into its valuation.
Dick’s Sporting Goods and Under Armour Stock
So, again, Under Armour continues to be difficult…We’ve been able to replace to lost Under Armour apparel business with other brands in the stores at this point. And to the extent that we can get that Under Armour business into a better position going forward it would bode better for the business as well.
That statement comes from Dick’s Sporting Goods (NYSE:DKS) chief financial officer Lee Belitsky on his company’s Q4 conference call this week. It seems rather damaging to Under Armour, though it’s worth pointing out the quote isn’t quite as negative as it seems at first blush.
After all, part of the issue for Dick’s is that Under Armour has expanded its distribution. The problem isn’t only Under Armour isn’t selling at Dick’s (though that is true), but that’s it’s selling elsewhere too. And CEO Ed Stack did say his company was “much more enthusiastic” about the brand going forward, echoing commentary from the third-quarter conference call.
Still, the weakness at Dick’s, which persisted into the key holiday quarter, does seem like an issue for Under Armour. This is a stock still priced at 45 times 2020 earnings-per-share estimates. It’s a turnaround play which requires years of growth — but, more importantly, margin expansion.
As I’ve detailed in the past, to expand those margins toward those of rivals Nike (NYSE:NKE) and adidas AG (OTCMTKS:ADDYY), Under Armour needs more full-priced selling. The weakness at Dick’s shows that’s not happening yet — which is a big risk to UAA stock.
Sales Elsewhere
Again, Dick’s management sees better days ahead. But with DKS stock back at 2011 levels, investors would do well to not quite take their word for it. And it’s useful to look at another retailer to see where Under Armour is growing.
That retailer is Kohl’s (NYSE:KSS). Per Kohl’s Q4 call, growth for Under Armour was positive in Q4. It was one of the three brands (along with Nike and adidas) that “continue[d] to perform well” in Q3. According to the Q2 call, it “has delivered very strong growth in its second year” of being distributed at Kohl’s.
What’s the difference? The difference is that Kohl’s is a lower-priced retailer that sells lower-priced Under Armour product. It’s that product that is moving — not the premium merchandise (and footwear) being shipped to Dick’s locations.
The difference between the two chains seems to highlight the key risk to Under Armour stock. Again, Under Armour itself isn’t expecting to grow into its valuation by accelerating revenue growth back into the mid-teens. It’s supposed to steadily, but surely, expand margins in North America while driving renewed growth overseas.
If Under Armour can’t sell at full price in the U.S., that margin expansion disappoints. Those five-year targets are missed. And, given that investors dumped the stock when those targets were announced, it’s hard to see how a miss means anything other than a decline in UAA stock.
As of this writing, Vince Martin has no positions in any securities mentioned.
