Under Armour Revenue Opens Up Investment Opportunity

A poor quarter and meek outlook could be a buy signal

Author's Avatar
Feb 01, 2017
Article's Main Image

Under Armour (UA, Financial)(UAA, Financial) shocked everyone by posting subpar fourth-quarter earnings. Revenue for the quarter grew by 12%, the first time in 27 quarters that the company has posted less than 20% year-over-year growth.

Even Under Armour was not expecting its fourth-quarter numbers to be so bad because, at the end of third quarter, Under Armour had forecast 24% growth for 2016, expecting full-year revenues to touch $4.925 billion. Due to this setback it had to be satisfied with $4.8 billion in full-year revenues, a growth of 22%.

Under Armour got squeezed in the North American market, posting $1.075 billion and accounting for nearly 84% of its overall revenues during the fourth quarter. Revenue from North America grew by a mere 6% during the fourth quarter compared to the prior period; the segment posted 16% growth during the third quarter. The international segment did reasonably well, reporting 55% growth during the fourth quarter against 74% during the third quarter, both over their respective prior periods.

The dismal announcement must have rattled investors because the company’s stock plunged by 23% after the earnings announcement. But what hurt investor sentiment more than the earnings miss was the downbeat forecast for 2017. Under Armour now expects its 2017 net revenues to grow 11% to 12% to reach nearly $5.4 billion.

“We anticipate the first quarter to grow at a midsingle-digit rate as fourth-quarter conditions in North America carry over and will have not yet lapsed some of the significant bankruptcies we saw in 2016.” – Under Armour Q4 Earnings Call

The above-20% growth rate that Under Armour posted year after year for the last several years now seems to have come to an end due to heavy competition in the North American market. With more than 80% of its income coming from this region, a slowdown in the market due to competition will affect Under Armour in a big way, and the company expects things to remain tight next year as well.

“It's important to note that North American apparel is still our largest and most profitable business by far. Accordingly, less-than-expected growth in this area disproportionately pressures our overall growth rate which we saw in the fourth quarter.” – Former Chief Financial Officer Chip Molloy, Q4 Earnings Call

After posting the worst single-day decline in nine years, Under Armour stock does look a bit attractive trading around 2.08 times sales, lower than the 2.71 times Nike (NKE, Financial) is trading at. The growth days of glory may well be over, and the hypergrowth stock might have to become a solid growth stock.

The company still expects strong double-digit growth rates to continue through the current quarter, and the fact that its product was able to stand its ground against Nike is, in itself, a testimony to its product lineup.

The worst quarter in several years and the resulting sharp selloff could possibly be the best thing to happen to investors. If you want to add Under Armour, then now is the time. And you can be certain there will be a few more opportunities as 2017 progresses.

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 seven-day trial of Premium Membership to GuruFocus.