Why Did Under Armour Drop Despite an Earnings Beat?

The long-term outlook is soft, but the company is on target for 2018

Author's Avatar
Oct 27, 2016
Article's Main Image

Under Armour (UA, Financial) came out with Wall Street-beating numbers during the third quarter only to see its stock plunge by more than 10%. Wall Street analysts were expecting the company to report a profit of 25 cents per share on the back of $1.46 billion in revenues, while the company reported a profit of 29 cents per share with revenues of $1.47 billion for the third quarter.

Despite the beat, the stock came under tremendous pressure, falling by more than 10% after the results were announced, as Under Armour tempered the growth expectations for next year and after. This was the 26th consecutive quarter of Under Armour reporting above 20% sales growth, and the company said that it expects growth to be in the low 20% range during 2017 and 2018 due to things cooling down in North America.

The slowdown in the apparel segment in North America has been going on for a while, and the company has been under pressure in the women's segment from as early as August of 2015.

SkBp2f_1tPa5zhpZ2hsnDCGSYKpetAmqmzspDu8oXspyoEty6wnCXeI_WJvosMr6flNsRfu1ry3L-slTpGLXyuHzJDEIJwOfn44Jf8v6bbziwDp2AE719AxdvKVwYeeyUURGDaWQ

Bloomberg reported in April that the average selling price of activewear has been in decline since the middle of 2015, while the overall market numbers remain stable. A stable market where the average selling price keeps coming down means the competition is killing each other and eating into each other’s margins. The overall state of the retail market itself has been a hit or miss, with some companies doing well and others doing poorly. KQ6QxroVEj7mTb3hYjAkAzfei-tcR7hO05WsIzLAXBqyBjFYFAjp4sePwsMqbCzsBCiaruFTyPPpGGUu7ILgWwMcpbpeCEkHAbNB9Wd6DtPwqURmxCbUW9mcN3iXFxm5-k4WzX0L

Under Armour makes the bulk of its money from the North American market. In the third quarter, North America brought in $1.225 billion of their overall $1.47 billion in sales. Even a slight dip in the home market can spell trouble for a company, and that’s exactly what Under Armour has in store for the future.

During the third quarter earnings call, Chief Financial Officer Chip Molloy addressed this issue. He said the company remains on track to hit their target of $7.5 billion in sales by 2018, but expect their revenues to grow consistently in the low 20% range in both 2017 and 2018. In the first two quarters of the current fiscal, Under Armour’s revenue grew by 30% and 28%, while annual revenues since 2009 have been growing in excess of 24% for the last six years.

If Under Armour hits the 24% growth number this year, then it would be the slowest the company has grown since 2009. That would not normally be an issue, but since the company expects to consistently grow in the low 20s, this raises concern. If sales numbers are going to come under pressure, then it brings in additional margin pressure. The company said during the earnings call that it will invest a lot more into keeping the growth story moving.

9wHwdvEVJwc0yE3hedG7RPWIhWfbip42CrarBNpmhlWciHGwl05w7iWJjoBfZq7SZ52yadDofWIuAJ5mDXC2KzDFeWBFzWVVnY-D97z3Mg3OU14WNOmgCnnawDvV0GvtZBqy04-z

“When you grow a business 20-plus percent a quarter for 6.5 years, it builds a unique profile that we find ourselves today, which means adding $1 billion and growing a year in revenue and it requires significant resources and investment," Under Armour CEO Kevin Plank said. "But I want to be clear, is that the growth remains intact, it just costs more short-term investment dollars to achieve and the belief is that greater efficiency can come later and that the growth that we have over the short-term EPS is a priority for our long-term goal of becoming the number one sports brand in the world.”Â

There’s nothing wrong with that move.I strongly believe that the company is looking inside to grow outside, instead of resorting to merely boosting the next quarter’s numbers. The margins should, in all likelihood, come under pressure as the company ratchets up its investments, but if it can help things in the long run, it will be a great decision for the company.

Despite the sharp decline after the earnings announcement, the stock is still trading in excess of 3 times sales and 50 times earnings. Due to the lofty expectations from the market, the stock will remain volatile.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

Start a free 7-day trial of Premium Membership to GuruFocus.