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Harsh Jain
Harsh Jain
Articles (150) 

Under Armour Has Not Bottomed Yet

The company's revenue growth has slowed considerably

July 12, 2017 | About:

Under Armour (NYSE:UA) (NYSE:UAA) disappointed shareholders in 2016, and the story is the same this year as well. The stock is down nearly 31% year to date and looks like it will continue facing problems in the year ahead considering its slowing sales, shrinking margins and migration of key executives.

The company’s revenue growth has slowed considerably. Its revenue surged 22% last year, down from 29% in 2015. Moreover, it is expected to grow just 11% this year. The primary reason behind that slowdown is continuously growing competition with the bankruptcy of Sports Authority saturating the market with low-priced athletic apparel and footwear.

On the other hand, Under Armour’s high dependence on the slothful North American market will also hurt the company in the coming quarters. Sales from the North American market fell 1% annually and accounted for more than 75% of its overall revenue last quarter.

Nike (NYSE:NKE) is Under Armour’s largest rival. Both the companies sell a similar variety of products and compete over professional athletic sponsorships, but the situations are completely different when it comes to worldwide reach.

In 2016, Under Armour generated just 15% of its sales from the international market whereas Nike generated more than 50% of its revenue outside the U.S. The company said it will expand its footprint in the overseas market with time, but it will not be as easy as it seems.

Although Under Armour’s direct-to-consumer business continues growing at a healthy rate, its wholesale business is struggling. During the last holiday quarter, the company’s overall revenue growth rate declined to 12%, down considerably from over 20% over the past 26 quarters. Furthermore, its revenue growth rate decelerated to just 7% in the most recent quarter.

In 2016, the company’s direct-to-consumer sales escalated 27%. Considering the healthy outlook for online sales, the company plans to invest massively in this sales channel. This move will help it counter slowing customer traffic at sports retailers as well as the price cuts that arise due to higher inventory levels.

On the other hand, the global footwear market is projected to reach $371.8 billion by 2020, representing a compound annual growth rate (CAGR) of 5.5%. The company currently generates less than 25% of its overall revenue from the footwear segment, suggesting it has sufficient room to grow.

Under Armour’s footwear segment reported a 50% surge last year. The company’s growing presence in footwear will likely hit its earnings growth as footwear usually involves lower profitability compared to apparel.

Apart from this, the company is aggressively trying to gain a strong foothold in the wearables industry. Despite all the promotional hype the company tipped into its fitness business to compete effectively with Fitbit (NYSE:FIT), its unit revenue surged only 2% on an annual basis and accounted for just 2% of its revenue. Moreover, the unit also posted an operating loss of $9.6 million in the prior quarter.

Unfortunately, Under Armour’s connected fitness division faces the same tumbling sales growth along with falling margins that scrunched up Fitbit during the past year. Despite all these, the company’s management said it will continue investing in the connected fitness division as it sees connected fitness as a real product opportunity for Under Armour.

Furthermore, Under Armour’s another significant competitor, adidas (NYSE:ADS), has displayed a sharp turnaround in recent years which could negatively impact Under Armour going forward. Adidas’ growth had stagnated for many years before it started an aggressive five-year turnaround plan in 2015. That plan comprises of massive e-commerce investments, expansions into urban markets and enhanced engagement campaigns with customers as well as retailers.

In 2016, adidas introduced several innovative products which helped it to report 30% year-over-year sales growth in North America. Adidas’ growing presence in North America suggests that its new strategy has started paying off.

Summing up

2016 had been a terrible year for Under Armour. Furthermore, it looks like the company will not be able to make a turnaround this year. The company continues facing fierce competition, especially from Nike and adidas.

On the other hand, the company also lacks the scale and marketing power to compete effectively against Nike and adidas, specifically in the footwear market which has comparatively lower margin. Moreover, the stock currently trades at a price-earnings (P/E) ratio of almost 48, greater than the twice of Nike’s current P/E of 23.

As a result, Under Armour’s high P/E ratio suggests it is highly overvalued and has not bottomed yet.

Disclosure: No position in the stocks mentioned in this article.


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