Under Armour (UA, Financial)(UAA, Financial) disappointed stockholders in 2016 as the stock was down about 28%.
In the past few years, Under Armour’s revenue has been rising at a strong rate, but the story is not the same in the case of earnings. The company hardly makes a profit in the first half of the year. In comparison, Under Armour’s profit margin comes in at 5.5%, down significantly from Nike’s (NKE, Financial) profit margin of 11.5%.
In 2015, the company publicized its goal of achieving revenue and operating income of $7.5 billion and $800 million by 2018, but at the end of 2016, the company lowered its operating income target to $600 million mainly due to the hasty investments it made to become a comparatively bigger player in the footwear and apparel industry. As a consequence, it was the primary reason behind the company’s 28% plunge in 2016.
It looks like Under Armour is on its way to achieving its goal of $5 billion in revenue for full-year 2016 as its sales in the summer season surged at a rate of 22%. On the other hand, third-quarter fiscal 2016 accounted for the 26th consecutive quarter in which the company reported 20% or better year-over-year sales growth.
Currently, Under Armour is aggressively focusing on the footwear segment as increasing footwear sales have been a primary reason behind the company's enormous growth. In 2011, footwear sales accounted only for 13% of the company’s overall revenue, but footwear sales are about to exceed $1 billion of yearly sales and presently account for over 20% of the company’s entire revenue.
The company’s latest connected shoes can be linked to a user’s account on MapMyRun mobile application. They are precisely designed to offer runners the digital tools necessary to realize recovery and eventually maximize performance. While basketball and running shoes segment performed amazingly well in 2016, the company is also placing its emphasis on other types of footwear.
According to grandviewresearch.com, the athletic footwear market is projected to grow at a compound annual growth rate (CAGR) of 2%, from 2017 to 2024 mainly due to the continuously rising participation in sports and fitness activities.
Moving ahead, Under Armour’s international sales are also increasing at a healthy rate with each passing year. The company projects to generate 18% of its overall revenue from overseas markets, which represents a surge of 12% compared to that in 2012.
Conclusion
2016 was an awful year for Under Armour, but the stock is poised to move upward in the coming years. Under Armour currently trades at a price-earnings (P/E) ratio of 42, significantly greater than the industry’s average of 25 which makes it overvalued. Therefore, it has become necessary for the company to beat its new operating profit guidance.
On the bright side, under Armour’s hard efforts in grasping a strong hold in the footwear market will prove to be a key growth driver in the upcoming year keeping in mind the positive outlook of footwear market. The company is also focusing on its international sales which will reap huge benefits in the long-run. As a result, long-term investors should consider buying the stock at market price.
Disclosure: I don't hold a position in any of the stocks mentioned in the article.
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