Athletic apparel rivals Under Armour Inc (NYSE:UAA) and Nike Inc (NYSE:NKE) both suffered their share of troubles in 2016. However, unlike NKE — which rebounded to close near multimonth highs in February — UAA stock keeps clawing out new 52-week lows and is pointed toward its all-time floor in the mid-teens, set in the depths of the financial crisis.
Slow revenue growth in the fourth quarter and a lower gross margin forecast are pummeling shares.
And UAA stock holders have no relief in sight.
Under Armour vs. The Competition: Not Much of a Competition
Markets are forward-looking, which is exactly why the stock’s prospects are weakening right now.
Also not helping things is UAA’s valuation. The stock trades at 41 times earnings, and features a price/earnings-to-growth (PEG) ratio of 8, making it several times more expensive than NKE.
Under Armour doesn’t deserve a steep valuation anymore. The brand’s clothing was hot and growing, but Nike is starting to claw back its gains. In the last quarter, Nike forecast revenue growth in the high single digits. UA is looking at low double-digit revenue growth for the next couple of years, but Under Armour has the reputation as the higher-growth upstart trying to eat Nike’s lunch. So that simply won’t cut it.
Yoga apparel maker Lululemon Athletica Inc. (NASDAQ:LULU) also reported a solid quarter last December, and it’s on track to report higher merchandising margins.
This all is bad news for Under Armour, whose premium sports styles and product innovation is suddenly not leading to higher revenue. Business is poor, and Under Armour can’t just cut SG&A spend in 2017 right away — management believes investments in its business will pay off.
But unless Steph Curry’s product line performs better, or the sports teams UA sponsored gain consumer interest, it’s hard to see where revenue will grow meaningfully.
And continued deceleration in growth will lead to an earnings multiple compression for UAA stock.
Clash of the Brands
A big issue for Under Armour in the most recent quarter was gross margin, which fell 320 basis points to 44.8%. The company needed to promote products and offer steep discounts to drive sales.
Such a strategy works to remove old inventory from the market. In the medium-term, though, the discounts end up hurting the brand name.
Mentions for “Nike” outpace “Under Armour” by a wide margin, as shown in the graphic above.
The stock’s failure to rebound — and NKE’s more recent rally — reflects a serious headwind facing Under Armour: competing with Nike.
Nike’s footwear brand power is strong. Under Armour’s shoes do not resonate well enough to consumers, partly because UAA has failed to show a significant difference in quality.
As long as Nike as perceived as the best, and Under Armour second best, UAA can only make so many inroads on America’s feet.
Waiting for Growth
Management touted international opportunities and footwear as catalysts for growth, but it admitted those bets are not bearing fruit. Instead of backing down on spending, Under Armour is still investing and curating.
China and Europe are areas of international growth:
“We feel particularly strong on China, very bullish on that market. It’s been one of our highest growth and becoming very, very profitable for us. A lot of great, great relationships that we’re building in that market with great leadership. Europe as well. We’ve had some great strides there also, making some good traction with the right marketing investments there.”
North America is still Under Armour’s biggest market. Overall, management believes it may grow revenue by 20%.
Bottom Line on UAA Stock
Investing in retail stocks is difficult, especially for value investors. When a stock becomes cheap here, it’s rarely a reflection of something the market is missing — and instead, it reflects a brand’s performance and worsening prospects.
While the valuation on UAA stock is coming more in line with lowered expectations, it’s still not there yet. And it’s also not likely that Under Armour will report a significant turnaround in Q1.
More of the same will send UAA shares lower.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
