Underperforming Under Armour

| About: Under Armour, (UAA)
This article is now exclusive for PRO subscribers.

Summary

Under Armour's growth story of old is gone.

The stock has lost 25% of its value this year as revenue, gross margins, and net income all falter.

With suffering across the whole of the athletic apparel industry, this is a big trend in the wrong direction.

At a P/E of over 50, the stock is still to expensive for what's been going on within the business.

I've been iffy on Under Armour (NYSE:UAA) for while. The price had factored in too many expectations. As sales growth failed to live up to the valuation, shareholders have suffered. The stock is down 25% year to date. With the slowing revenue growth across multiple companies including Under Armour and Nike (NYSE:NKE), there's a trend here that doesn't bode well for Under Armour through the year. The athletic market is saturated with so many brands that each company is struggling to maintain its percentage of the pie. With a price to earnings ratio of more than 50, UAA's stock is too expensive to justify given the slowing pace of financial performance.

The first quarter didn't help things

The first quarter of 2017 had a loss of $2.27 million in net income. That's a big pullback from the $19.18 million profit in Q1'16. It's a continuation of Under Armour's inability to live up to the high valuations given by the market. The last five years have displayed slowing progress in revenue, income, and earnings per share.

Under Armour

2012

2013

2014

2015

2016

Revenue

$ 1,830,000,000.00

$ 2,330,000,000.00

$ 3,080,000,000.00

$ 3,960,000,000.00

$ 4,830,000,000.00

% change

27%

32%

29%

22%

Gross Income

$ 877,100,000.00

$ 1,140,000,000.00

$ 1,500,000,000.00

$ 1,900,000,000.00

$ 2,230,000,000.00

% change

30%

32%

27%

17%

Net income

$ 128,390,000.00

$ 162,170,000.00

$ 208,040,000.00

$ 232,570,000.00

$ 197,980,000.00

% change

26%

28%

12%

-15%

Diluted EPS

$ 0.61

$ 0.75

$ 0.95

$ 1.05

$ 0.45

% change

23%

27%

11%

-57%

Everything really peaked in 2014 when UA was bringing in 32% revenue growth, 32% growth in gross income, and 28% growth in net income. Ever since, things have been slowing. It's not a trendy shift either. We've seen almost two and half years of decreasing business growth. The company isn't maneuvering to maintain margins in spite of the slowdown either. 2014 net income had 28% growth; with a 27% improvement in earnings per share. 2015's results fell to 12% income growth, with an 11% increase in earnings per share.

Now, a one-time event is one thing, but the habit has become a trend as retailers begin to suffer from too many players in the market, and Amazon's ever growing strength. Not only did 2016's sales growth fall below 2013 levels, but net income growth was altogether negative. At $197.98 million, it was a 15% decline from the year prior. This resulted in a 57% decline in earnings per share. You'd have to go back to before 2012 to find returns to shareholders that low.

Outlook is tough

Some are getting hyped up on Under Armour stock over the prospect of higher basketball shoe sales; but I don't see how shoes alone will throw off diluted demand that is occurring in the athletic apparel industry. If it were Under Armour, and Under Armor alone, I'd get it; but growth is slowing across the whole sector. Nike is also suffering from slower growth. As are less massive contenders like Lululemon (NASDAQ:LULU). There are a lot of factors that go into why it's happening, but I personally contend that the main culprit is the sheer number of companies now competing for market share. Adidas (OTCQX:ADDYY) is making a huge comeback in the US market, and many small knock off brands are gaining more exposure via eCommerce where price comparisons hold more dominance over brand loyalty.

Think about it. If you're in a Nike store looking for shorts, you're probably going to make a choice out of the options there; which are all Nike. If you're shopping on Amazon, you can compare Nike's offerings to anyone else and choose the best deal for what you're trying to do. It's a real problem for the old stalwarts, as it has created hyper-competition in pricing.

I'm not the only one still bearish on Under Armour. Some analysts have price targets at $14. The year has been tough for Under Armour's retail exposure as bankruptcies like Sports Authority result in lost avenues to consumers. The brand recently got its products into Kohl's (NYSE:KSS), but discounts by the retailer could lead to price fallouts as everyone competes for sales.

As a golfer, I love Under Armour shirts. Unfortunately, there are so many substitutes that it doesn't hold the demand as when it was new and trendy. In a clarifying move for the industry at large, JP Morgan (NYSE:JPM) downgraded Nike on slowing sales growth. If the king is slowing down, it's a pretty clear indicator that Under Armour's woes are not a fluke. The industry is stretched with too many players. Retail fallout combined with Amazon's effects on pricing, and substitute goods are making it harder to maintain the growth of years past. With rumors circulating about Amazon making its own clothing lines, I am very fearful as to where things are heading over the next few years.

In this type of uncertain environment, how can a stock price 50x above earnings be validated? I don't think it can be. The stock could easily find $14 a share if there's no change in momentum in the second quarter; and I don't think it makes any sense to buy stock at these valuations. Even if it has lost 50% of its value over a year's time, there seems to still be more room to fall.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.