Under Armour Isn't Growth, Isn't Value - Avoid

Summary

• Disappointing results: No Growth in North America, 1% in footwear, no mention of their women's business.
• The business is not being run optimally with rising inventory, rising accounts receivable, falling margins.
• Under Armour is not a growth stock, not a value stock, it's pure speculation.

For years I've been arguing that Footwear + International could take under Armour (NYSE:UA) (NYSE:UAA) to the promised land. That was back in the days when the company was consistently growing 20% per year. Those days are long over. The company grew revenue 6% last quarter.

-1% Currency neutral in North America: $868 million (73% of revenue)

23% EMEA: $127 million (11% of revenue)

35% Asia Pacific: $116 million (10% of revenue)

21% LatAm: $47 million (4% of revenue)

We can talk about nice overseas growth rates, but off of what base? At the end of the day, we are talking about $10, $30, $40 million revenue increases overseas, which are peanuts. The bigger issue to me is that Under Armour isn't winning on their home turf. What does it say about the brand that they can't grow in North America anymore? Sure, they can be new in China, Italy, Spain, Mexico, Chile and sell some shirts but is that a fad or will the brand grow there long term?

Footwear

The other pillar for growth is Footwear.

+7% Apparel: $766 million

+1% Footwear: $272 million

+3% Accessories: $92 million

The biggest disappointment is the lack of growth in footwear. How many pairs of shoes will you buy before you disregard a company? In the past, management kept touting the newest Curry's and the newest speedform running shoes but footwear growth is non-existent.

The latest hope is their HOVR product. In my words, it looks like the knock-off of Air Max or Boost with their "energy web" sole. The price point is $100 to $140 and the shoes have a built in chip for their fitness apps.

Selling lots of apparel is great, but you can't be a dominant global brand selling $272 million worth of shoes in a quarter with no growth. The end game of signing Curry wasn't just to sell his signature basketball shoe. The point of signing an NBA All-Star was to give the brand a strong name so that people would buy their other shoes.

So far that's not happening and Under Armour can't win if they can't get footwear right. Footwear is the #1 most important thing, over international growth. Long term, "if you build it, they will come." If you have quality shoes, the rest will take care of itself. Having a temporary jolt of international sales is great, but without quality footwear, they can't be the dominant brand that longs hope for.

Other problems

I feel like a broken record but there is an inverse relationship between Under Armour's falling margins and their rising inventories. Every quarter margins go down, and every quarter their inventories rise. Some of the astute commentators in past articles have speculated that the company is dumping excess inventory overseas.

A 27% rise in inventories led one sell-side analyst to call the problem, "out of control."

the increase in receivables appears to highlight large shipments at the end of the quarter," wrote Susquehanna analyst Sam Poser early Tuesday, prior to the earnings call. He also expressed skepticism about the health of Under Armour's business abroad. "The combination of high receivables and elevated inventory levels looks like a ticking time bomb to us," he wrote.

Accounts receivable were up 28% and Under Armour started recognizing revenue slightly differently. To me that's another red flag.

Relative to accounts receivable, which was up 28%, it is important to note that during the quarter, we had opted ASC 606, a new revenue recognition standard. Due to this change, a large portion of reserves that were previously recorded as offsets to gross accounts receivable are now being classified within other areas of the balance sheet. Without the accounting principles change in 2018, our accounts receivable for the first quarter would have declined 16% on a comparable basis.

You could talk about revenues all you want but there are a couple of explanations here. Either the business is being run poorly from an operations standpoint OR the brand is not as strong as management thinks. You can't keep having rising inventories and falling margins, then a big uptick in accounts receivable to magically get a slight beat. That stinks and maybe that's why there's been so much turnover.

Guidance And Valuation

At the end of last year, they guided .18 to .20. Current guidance is .14 to .19. and it wasn't raised after the earnings call. Let's say they hit the top of their mark at .19 cents for the year. $19 per share we'd be at 100x earnings.

100x earnings for a company that's perpetually growing @ 20% per quarter? Maybe. 100x for a company that's growing in the low-single digits? Not interested.

Hope is not a strategy. Many hope that one day Under Armour can challenge Nike (NKE) and adidas (OTCQX:ADDYY). Under Armour is more in the peer group of Puma (OTCPK:PMMAF). In February, I wrote that, "I'd rather buy Puma than Under Armour" and I stand by that statement. Puma pays a dividend, has faster growth, better for the #1 sport in the world and has gained popularity with women by having Rihanna as a creative director. Under Armour didn't mention "women" or their women's business once in their last conference call. I've long argued it's a male-dominated brand and that's the other hidden pillar for growth that they are literally ignoring.

Many argue that all of these problems mean Under Armour has even MOAR (sic) runway for growth! That's like saying the Cleveland Browns have been bad for so long that they are designed to win. If you want to speculate, fine, but this is not a value stock and this is not a growth stock, it's speculation. Given that the math of loss is so detrimental to investor returns, and given the risks, this is a stock to avoid.

Analyst’s Disclosure: I am/we are long NKE. 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.

Comments

[ed naples]

You own NKE isn"t that a competitor of UA DUH!

[meelistara]

very biased article, with few arguments other than to just throw dirt. If it would be growing the same in US as abroad it would be 3x the price. Your thinking would mean regarding pe that one year of loss making would make company worthless. Please look at price to sales and other ratios. UA is cheap!

[No Guilt]

If my Aunt had a D she'd be my uncle.

[blacksaleem]

Price to sales would be meaningful if they were structurally profitable like NKE and LULU. So maybe some day they will be. That's the only argument that I see to justify the stock price.

[shadoefax7]

So your just some bird brain that only invests in dividend stocks giving your opinion on a company you have no interest in? lol!

[No Guilt]

"you're"

I like their polo shirts and gym wear. I don't like the stock.

[sam$$]

spot on analysis.
PE 100, saturated market . that's a long runway but if you dont take off you end up in the bushes.

[No Guilt]

Thanks for reading and I agree.

[NewEnglanderinIowa]

I’m long UA and a believer.
They need to focus.
Nike management issues w sexual harassment is an opening...

[No Guilt]

How so?

[benetltribble]

"The latest hope is their HOVR product. In my words, it looks like the knock-off of Air Max or Boost with their "energy web" sole."

Don't knock it before you try it.

http://bit.ly/2w8L6AQ

[No Guilt]

So will footwear actually grow for once?

[benetltribble]

My investment is based on the speculation that footwear will grow. I'm more confident after frisk's hiring, given his experience in the segment, as well as their obvious improvement in the product line over the past 18 months. I do believe the story they are selling, that this time next year the results will manifest.

[Pmagrant]

They tried stepping into women’s footwear/apparel the brand didn’t translate as they pour money in and bled loses overall. Last year they stopped the bleeding getting back to the basics. Growing the international presence which has a combined economic strength which is growing faster than America. I see this earnings report as a direct result of UAA tabling their push towards entry to the woman consumer. And building on their current international base and market.

Though disappointing they have not increased market share in America there are many ways to build company strength. Their best route based on what they are currently capable of is international growth and the sports athlete.

Once they obtain a new designer to tackle womenswear they will move growth in that sector as well but they know from experience just jumping out the window is not the way to go.

Although I understand your reasoning and you have points we still must recognize finding the value in a company is in finding what they do best and amplifying that... I believe in the new course set. And they will be back on everyone’s radar as a true competitor without the fear by this time next year.

[DouglasTichner]

Your comment exemplifies the type of “hope” the author warns about.

For example, you seem to think that if UA merely gets a better women’s designer, all will be well. But that belief ignores the reality that UA’s “women’s problem” is as much a BRAND problem as it is a product problem. UA is seen by the marketplace as more of a macho, gym-rat brand than it is a lifestyle brand. Much less a women’s lifestyle brand.

And in thinking (or “hoping”) that UA is going to rebound within 12 months, you are completely ignoring the loss of brand equity and WHY that brand equity was lost. Simply put, UA was a faddish brand that doesn’t have the long-term brand cache of an adidas or Nike. Consumer surveys show this, retail data shows this, and Google Trends data shows this. And of course it’s all reflected in the financials where you see UA unable to offload product, resulting in massive inventory spikes.

I would ask any long, “What do you believe is the catalyst for reversing the negative trend in brand equity?” If they can’t answer that with anything resembling a reasonable and realistic answer, you’re looking at a “hope” investor rather than a strategic investor.

And don’t even get me started on footwear...

[No Guilt]

Pmagrant,

How did they stop the bleeding?

I don't see the woman consumer at all. In the old days the consensus was that UA needed international + Footwear and some argued women were the third pillar as it's a macho man brand.

They did an entire call without mentioning the women. In the past they will at least mention Misty Copeland once, or some internal promotion or sales figure, but nothing. Curious as to why you think the women's business is healthy?

What they do best is apparel ... what they need to do to get where the "hope" buyers want is footwear. Their shoe brand is NOT healthy and probably even worse than the numbers suggest.

As DT points out, this has been fairly predictable if you look at things objectively, data, stats, financials, google trends, brand surveys etc.

[Pmagrant]

Man everything I just wrote just erased.

Attempts to stop bleeding happened in 4th quarter. Stock bottom out as the company began a corporate wide adjustment. 1st earnings finally was positive after bleeding loses for the pass 2 years. Of course continued commitment is required by UAA to build upon this.

DT simply put they do need new designers to break into womenswear. What that means a designer able to align the UAA brand in a way to organically captivate women to wear their product that takes time.

However building their base slowly nationally and building their global base will allow the leverage to build strong consumer interest, and demand. Their global growth is stronger than their national it makes sense to build in your strengths as you improve your weaknesses. I enjoy UAA products however, they were overvalued for some time especially the way they were spending with negative Roi for the past 2 years. Their mismanagement allowed an opportunity for me to buy in at $11.63 in November after the announcement of a corporate change in direction. All they have to do is stay the course. The remaining quarters will be more showing.

[ed naples]

You stated you would buy Puma. But you haven"t. So what"s up with that?

[No Guilt]

I DID buy Nike.

I said I'd rather buy Puma. If given the choice that I had to buy Puma or I had to buy Under Armour I'd buy Puma.

[Rhmassing]

No guilt, got caught with your short position? Nice!

[DrewMcVay]

Gotta love the herd trade getting stuck, in whatever it is

[No Guilt]

Not at all.

Thanks for reading.

[chazdg12]

I like UA. I like the product, the company and the stock. They are actually just a front company for Chinese manufacturing, but it really doesn't matter to me.