Under Armour (UA) posted fiscal fourth-quarter results Thursday that weren't as impressive as previous quarters. Though revenue grew 34% from the same period a year ago, the growth rate represents a modest slowdown from the previous quarter's pace of 41.7% and the 35.7% rate recorded in the fiscal fourth quarter of last year.
Under Armour cited the unseasonably warm weather as the main culprit in the slowing growth, and while we wouldn't exactly call this revenue expansion subpar, several of our concerns regarding the firm are starting to come to fruition. For one, gross margins continue to fall. Granted, the 10-basis-point decline isn't substantial, but profit margins aren't growing, and we don't expect them to expand anytime soon. Earnings per share, however, still advanced an impressive 40%, as a result of the increased sales and leveraging of SG&A.
Second, we think management is overestimating its opportunity in the footwear space. CEO Kevin Plank cited strength in its marketing campaigns, but failed to elaborate on their effectiveness. In fact, we've found UA basketball shoes on-sale for as little as $15 at retail outlets, which pales in comparison to the lines of people waiting to buy $180 pairs of Jordan (NKE) shoes.
Certainly, such a discount implies that the channel may be a bit stuffed. On the basis of Under Armour's current market positioning, we don't expect the footwear segment to gain significant traction relative to the firm's larger competitors. And as long as the products and endorsements lack the stature of its competitors, Under Armour will have a difficult time making significant strides transitioning to a diversified athletic products company.
With the shares still trading over $70, we maintain our view that the company is overvalued. We continue to evaluate the firm as a put option candidate in the portfolio of our Best Ideas Newsletter.