Time to Sell Under Armour (UAA) Stock?

Shares of Under Armour UAA plummeted over 10% Wednesday as investors signaled their displeasure with the sportswear firm’s long-term guidance it provided at its investor day. Under Armour is still up big over the last year after UAA road a wave of positive momentum after a massive 2017 selloff. But Under Armour’s growth doesn’t appear strong as it struggles to adapt to a new sportswear-driven age.

Overview

Right off the bat, let’s remember that Under Armour is in the midst of a $200 million to $220 million restructuring plan. The revamp has seen the company cut its workforce and try to streamline both its go-to-market strategy and product offerings. Under Armour’s Q3 revenues did climb roughly 2% to $1.44 billion, which also beat our $1.41 billion estimate.

However, key North American revenues slipped 1.6% to hit $1.06 billion. This came after North American sales dropped 5.3% in the third quarter of 2017. Overall, North American sales have now fallen in four of the past five quarters.

 

Many investors were likely pleased at the time to see Under Armour’s international business jump 15% to $351 million. This, however, marked a slowdown from previous quarters in key international markets. On top of that, direct-to-consumer revenue came in roughly flat at $465 million, at a time when most retailers have made significant and successful direct-to-consumer pushes in the Amazon AMZN age.

Under Armour’s biggest rivals, Nike NKE and Adidas’ ADDYY direct-to-consumer businesses have performed well as of late as they shift away from the likes of wholesalers such as Dick’s Sporting Goods DKS and Foot Locker FL. Meanwhile, native direct-to-consumer and yoga giant Lululemon LULU has boosted its e-commerce sales in a big way.

Lululemon’s growth also highlights one of Under Armour’s biggest weaknesses: The company hasn’t been able to offer compelling athleisure and non-performance wear.

Looking ahead

Under Armour announced at its first investors day in three years that it expects low single-digit growth annually in North America from 2019 through 2023. Meanwhile, the firm called for mid-30s growth in the Asia-Pacific region in 2019 and mid-20s growth from 2020 to 2023.

Right now, our Zacks Consensus Estimate calls for Under Armour’s Q4 revenues to pop just 0.64% to hit $1.37 billion. The company’s fiscal 2018 revenues are projected to reach $5.18 billion, which would mark a 4.07% jump from fiscal 2017.

With that said, Under Armour’s adjusted earnings are projected to jump nearly 16% for the current full year. Plus, UAA’s fiscal 2019 EPS figure is expected to surge 61% above on current year estimate.

 

Bottom Line

Clearly, Under Armour’s earnings outlooks appears relatively strong as it tries to streamline its business and boost its direct-to-consumer sales. But low-single digit sales in the region that accounted for 74% of revenues last quarter for the next five years is hardly a good sign, especially when we remember UAA has some down years to build on.

Investors should also note that UAA is currently trading at 63.9X forward 12-month Zacks Consensus EPS estimates. This marks a massive premium compared to its industry’s 14.3X average, the S&P 500’s 15.8X, and Nike’s 25.4X. We can also see that UAA has traded at far lower forward earnings multiples over the last five year.

 

Under Armour’s long-term success could come down to its ability to revamp its lineup to match the current sportswear trends, where it lags behind not only Nike and Adidas but also smaller companies such as Puma. The company’s lack of “cool” might be made even harder to cultivate as the current retro wave continues since the company is not really old enough to revamp older looks. Plus, Under Armour has also likely not made a strong enough push into the world’s most popular sport, soccer, in order to make a massive international expansion.

In the end, the company’s current performance gear-based strength, highlighted by its successful workout line with Dwayne “the Rock” Johnson, likely won’t help the firm truly compete against the real sports apparel giants.

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