- 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?
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.
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.
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