Sports apparel company Under Armour Inc. (UA, Financial) (UAA, Financial) reported better-than-expected earnings for the second quarter, but investors were less than impressed as the company announced dour forecasts for the rest of the year.
Under Armour has now become the classic case for how easily things can go wrong for companies that trade at high valuation multiples, and why margin of safety is extremely important for all investors.
The company posted a per-share earnings loss of three cents, beating the market expectation of a loss of six cents. Second-quarter revenues came in at $1.088 billion, surpassing the expected $1.077 billion.
"After six-and-a-half years of more than 20 percent top-line growth that ended in the fourth quarter of last year, we are clearly operating in a different environment, particularly in our largest market [of] North America," Chairman and CEO Kevin Plank said.
Less than 12 months ago, Under Armour was delivering record double-digit revenue growth quarter after quarter and the stock continued to trade above five times sales. A resurgent Adidas (XTER:ADS, Financial) had a huge impact on both Nike (NKE, Financial) and Under Armour’s future plans. As growth slowed to a crawl, the latter lost nearly half of its market capitalization and is now trading at 1.76 times sales.
The stock has been moving sideways in a narrow margin of $19 to $23 since February, and things are not looking good as the company revised its forecasts downward. Under Armour now expects 2017 revenue to grow in the 9% to 11% range, down from 11% to 12% growth.
Following in the footsteps of Nike, which announced a strategic shakeup in June, Under Armour announced a restructuring plan to improve its speed of delivery and efficiency and expand its digital capabilities.
Plank expanded on this plan, saying the company was taking a consumer-led approach to increase its speed and ampliby its digital capabilities.
"We've identified a number of areas to enhance our operational capabilities, drive process improvement and gain greater efficiencies," Plank said. "We remain steadfast in driving and building our brand while shifting our operational focus to become more return-on-investment and cost of capital centric - institutionalizing discipline to deliver more consistent, long-term shareholder value."
But the problem is restructuring plans takes months, if not years, to start yielding results, and Under Armour’s problem seems to be in a single market filled with competition.
In the first six months of the year, Under Armour lost 0.4% sales in the most crucial North American market. During the second quarter, the company made $829.805 million from North America, which is 76.25% of its overall revenue of $1088.245 million. With more than two out of every three dollars coming from this market, Under Armour’s revenue growth rate is directly tied to its performance in the U.S.
With Nike and Under Armour facing slow growth in this region and Adidas continuing to report double-digit growth rates, a turnaround will take a while. Until its growth rate improves in North America, Under Armour’s stock will remain under pressure.
Disclosure: I have no positions in the stock mentioned above, and no intention to initiate a position in the next 72 hours.
