This article was updated on July 6, 2017, and originally published on Feb. 6, 2017.
What happens when a company that's reported 26 straight quarters of 20% revenue growth or better suddenly doesn't? The stock falls off a cliff, of course.
That was the rude awakening for Under Armour (UA 1.54%) (UAA 2.02%) earlier this year after revenue growth in the key fourth quarter of 2016 came in at just 12%. The stock plummeted 26% after the January report -- and that was the second report in a row that's driven shares down more than 20%, as the company has twice dialed down its guidance significantly. In its first-quarter report in April 2017, the company posted its first every quarterly loss as a public company, but it beat estimates, giving the stock a modest bump.
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CEO Kevin Plank has blamed several factors for the slowdown in revenue growth, which has continued into 2017 as revenue growth was just 7% in the first quarter. Bankruptcies in sporting goods retail such as that of Sports Authority had hampered growth in 2016 and continued to do so into 2017. The liquidations weighed on prices, forcing discounts, and the company did not see the sales reappear in other channels in the way it had expected. Sales through October were strong, but they hit a bump afterward as, according to Plank, "slower traffic caused significant promotional activities earlier, deeper, and broader than expected."
The company seemed to have the wrong product mix as tastes evolved to "lifestyle" items. He also said of the fourth quarter that the company did not have the right amount of cold-weather gear available. Revenue growth in apparel, which makes up the bulk of the company's sales, slowed to just 7% in Q4 2016 and Q1 2017. Footwear sales growth, once the company's most promising segment, came in at just 2% in the first quarter.
The poor top-line performance and promotional environment trickled down to the bottom line as gross margin compressed 320 basis points to 44.8% in Q4 2016 and operating income actually decreased 6% to $167 million. Earnings per share in that period fell by a penny to $0.23. In Q1 2017, the company reported a loss of a penny per share, down from a profit of $0.04 the year before.
Following the fourth-quarter report, CFO Chip Molloy said he was leaving the company immediately for personal reasons, a surprising move since he had only been with the company for a year.
It gets worse
While the fourth-quarter results were certainly disappointing, Under Armour's guidance for 2017 also left much to be desired. The sportswear maker sees revenue growth continuing at just 11%-12% this year, and it expects operating income to decline to $320 million from $420 million last year as the company makes strategic investments in marketing, new product innovation, connected fitness, the international market, and other areas to build for the future.
Management had foreshadowed such a slowdown in the company's 2016 third-quarter report when it scaled back operating income guidance for 2018 to $600 million from a previous forecast of $800 million. The company said profit growth would slow as it makes investments to "get big, fast," but Plank also reassured investors that the company would still hit its revenue goal of $7.5 billion in 2018. That statement seemed questionable at the time, as the extra investments the company needed to make only served to maintain the revenue growth rate it had before, and indeed revenue slowed significantly.
Based on the 2017 guidance, management is only expecting to reach $5.4 billion in revenue this year, making $7.5 billion in revenue next year out of reach -- it would be almost impossible for the company to grow its revenue by nearly 40% in a single year without an acquisition.
At a crossroads
The stock got hammered on two earnings reports in a row, and results in Q1 2017 were not promising. When a high-valued growth stock doesn't live up to expectations, it tends to get slashed. The stock has now lost more than half of its value since the summer of 2016.
The good news for investors may be that the bad news is now out on the table. At a P/E of 53, though, Under Armour stock could still fall further if it misses its current guidance. The company still needs to prove it can come out on the other side of this strategic investment period, which does not seem guaranteed based on two straight deep guidance cuts, and investments in areas like connected fitness have yet to pay off on the bottom line. Plank also may have lost some credibility with investors after reassuring them of the $7.5 billion mark by next year. At this point, Under Armour looks headed for $6 billion in 2018 instead of $7.5 billion.
The company's brand remains strong, and it's forged a number of key marketing alliances, such as deals with Major League Baseball and UCLA, which should begin paying dues once they kick in. But the company is still struggling to be a lifestyle brand. The market for sports performance apparel is only so big, especially when cheaper knockoffs abound. Plank and his management team understand this, but their ability to develop a meaningful presence in streetwear will ultimately determine if it can match rivals like Nike (NKE 0.49%) and Adidas.
