Why Under Armour Will Underperform in 2012

Athletic apparel company Under Armour (NYSE: UA  ) closed out its fiscal 2011 with strong earnings. However, inventory problems remain, and the competition shows no sign of fatigue. Still, many investors think Under Armour is a buy. Let's take a look at what the company is doing to shape up for the year ahead.

Management continues to throw money behind its foray into the athletic footwear business. A better idea would be for Under Armour to tackle its current inventory problems before attempting to beat Nike's (NYSE: NKE  ) shoe domination. As a leader, Nike innovates at every turn. Recently, Nike launched its new Nike+ FuelBand -- a fitness wristband that syncs with your iPhone to track and monitor your every move. It's hard for me to imagine Under Armour taking significant market share from Nike in the sneaker arena, especially with Nike's tie-ins.

Survival of the fittest
With inventories growing faster than sales, Under Armour could face steep markdowns on its current merchandise -- further depressing already thin profit margins. Rival lululemon athletica (Nasdaq: LULU  ) has the opposite problem (if you can call it that). The retailer can't seem to make enough luxury yoga gear to meet demand.

I think it's a mistake not to consider Lulu a strong competitor in the athletic apparel space. True, the yoga company fits a niche market. But it's expanding into new segments including girls dance apparel and athletic gear for runners. Lulu's product line for men is also expanding, which puts it in closer competition with Under Armour.

Another retailer pushing into the space is Limited Brands (NYSE: LTD  ) . Through its Victoria's Secret stores, the company is offering a new line of athletic wear for women. Although the fit-focused apparel from VS doesn't match up to the fabric innovation found in Under Armour's thermal wear or Lululemon's luon products, it is indicative of the competition that's heating up in this space.

 

Current P/E

Net Profit Margin

Nike 22.17 9.85
Under Armour 42.63 6.58
Lululemon 55.93 18.98
Limited Brands 14.45 9.15

Source: Finviz.com.

Break a sweat
Investors want to see growth from these companies. But that may be a tall order for Under Armour considering the headwinds facing the company. Its stock continues to trade at a high price-to-earnings multiple, though not nearly as rich as Lulu's P/E.

Under Armour is also strapped for cash. The company's high-maintenance brand demands cash-heavy promotions and marketing efforts. High costs have led to Under Armour's negative free cash flow situation. Take a look at Under Armour's net profit margin compared to competitors, and our fears are compounded.  

As my fellow Fool Austin Smith recently pointed out, Under Armour and Nike sell their products through retailers such as Dick's Sporting Goods (NYSE: DKS  ) . However, Lululemon distributes through its own stores and website -- allowing it to keep more of the profit from sales. Under Armour, on the other hand, is too dependent on Dick's for sales growth, which could be a problem going forward.

The takeaway
All three of these companies make great athletic gear. While I'm a fan of Under Armour's thermal tops and compression shorts, I can't get behind the stock. Why not invest in The Motley Fool's top pick for 2012. I invite you to read this free report, available for a limited time, in which our leading analysts' reveal their top stock for the year ahead. Click here for instant access -- it's free.  

Foolish contributor, Tamara Rutter owns shares of Lululemon. Follow her on Twitter using the handle: @TamaraRutter. The Motley Fool owns shares of lululemon athletica, Under Armour, Dick's Sporting Goods, and Limited Brands. Motley Fool newsletter services have recommended buying shares of Nike, Under Armour, and lululemon athletica. Motley Fool newsletter services have recommended creating a diagonal call position in Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 08, 2012, at 10:34 AM, rabec1 wrote:

    I disagree with your article. While the company does have some inventory problems and could possibly perform worse than the market in 2012. I believe Ua is a great investment. The company is an innovator. Not sure what % of sales comes from retailers like Dick"s, Ua has good online site and is expanding outlet stores. Ua will take market share from Nike, Addidas, etc. in shoes as people like me who love their other products try their shoes. The Nike baskeetball shoes I'm wearing now will be replaced with Ua's as soon as they wear out. These will be the last pair of Nike"s I own.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1774019, ~/Articles/ArticleHandler.aspx, 12/19/2014 5:48:28 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement