Why It's Time to Cut Under Armour From Your Portfolio's Lineup

Athletic apparel manufacturer Under Armour (NYSE: UA  ) needs more than a shot of Gatorade and a pep talk to wake up its stock from a two-week slump.

The company faces trouble on the heels of slowing quarterly sales. Ready to chip away at Under Armour's gains of recent years, industry titan Nike (NYSE: NKE  ) and fashionable alternative lululemon athletica (Nasdaq: LULU  ) threaten to upset UA's sizable market share. Although Under Armour's stock has performed well since the recession, concerning financial numbers and overvaluation could spark a further decline in price.

What's going on here?
Under Armour's stock sports a hefty premium, with a price-to-earnings ratio of 48.5, far exceeding the industry average of 28.7, and a five-year PEG of 1.8. UA's forward P/E of 30.4 tops the industry as well, a warning sign for a company with mounting inventory that may have to be discounted. The company accumulated $70 million of long-term debt over the past year. Although the company cut that number to $32 million in the most recent quarter, more financial woes abound. UA shed $68 million in cash and picked up a comparable amount in receivables.

The company faces further uncertainty from online megaretailer Amazon.com's (Nasdaq: AMZN  ) foray into the sporting goods market, potentially hampering the retail operations of big-box stores that host UA's products. Under Armour does not sell directly to Amazon, and still traffics most merchandise through third-party retailers. Despite the recent success of companies like Dick's Sporting Goods, a major purveyor of Under Armour products, being married to the continued success of another company can be dangerous. Should Dick's lose luster and open less successful stores in the future, Under Armour could take a hit.

While UA's efficiency looks solid with net income margins of 6.4% and a return on assets of 13%, it's other players in the athletic apparel market that relegate Under Armour to the second tier.

"Not so fast!" says lululemon athletica
Industry darling lululemon athletica provides Under Armour's latest hurdle. Despite its meteoric growth, Lululemon still holds no long-term debt. That's great news for future expansion, particularly for a company with holdings concentrated in the U.S., Canada, and Australia and plenty of room to grow.

Lululemon destroys Under Armour across the financial field. Boasting a ridiculous return on assets of more than 29% and net margins of almost 18%, Lululemon's numbers offer it greater short-term flexibility than its rival. Investors may take a cautious approach to Lululemon's PEG of 1.3, but that greatly beats UA's outlook. The company's recent drop in price betrays its financial strength, suggesting Lululemon's stock is primed for a rebound.

Lululemon's success focusing on women and yoga enthusiasts has walled off a sector for it to fall back on, allowing the company to make inroads into some of Under Armour's more traditional markets, like running, without risking its hard-won gains. Under Armour's aggressive advertising and high-quality products have given it a great run, but the company will have a tough time staving off Lululemon's burgeoning popularity.

Nike's still the industry MVP
Unfortunately for both companies, industry behemoth Nike still dominates the field. Boasting better net income margins than Under Armour (more than 9%,) Nike's swoosh permeates every facet of the market. While Nike holds $369 million of debt, its $2 billion of discretionary cash on hand greatly diminishes that problem. Although its profit declined 8% in its most recent quarterly results, the company's revenue has remained steadily increasing year over year since 2009 and it holds an industry-beating five-year sales growth rate of 6%. Nike easily absorbs financial hits that could cripple a smaller rival.

Time for Under Armour to hit the showers
Neither Lululemon's growth nor Nike's size speak of a coming apocalypse for Under Armour, but I believe the combination of questionable financials and toughening competition will force the stock to decline from its lofty perch. CEO and founder Kevin Plank speculated that his company would invest heavily in its footwear business in the near future, but in a market filled with rivals such as Adidas, New Balance, and Asics, I have to wonder whether Under Armour can establish the same brand advantage it enjoys in apparel.

Competition squeezes Under Armour into a sticky situation with few ways to continue hanging on to its overvalued foothold. The stock offers no dividends for the income investor, either, a big benefit from Nike.

Lululemon vaulted from a minor player to a superstar in the athletic apparel industry. To get ahead of the next high-growth success story, check out The Motley Fool's free report "Discover the Next Rule-Breaking Multibagger." Buying a stock ready to bloom can boost any portfolio from slum to star; get your free report by clicking here.

Fool contributor Dan Carroll holds no positions in the stocks mentioned in this article. The Motley Fool owns shares of lululemon athletica and Under Armour. Motley Fool newsletter services have recommended buying shares of Under Armour, Nike, and lululemon athletica, creating a diagonal call position in Nike, and creating a bear put spread position in Under Armour. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (3) | Recommend This Article (8)

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 July 10, 2012, at 7:00 PM, PAJO106 wrote:

    OMGosh, what happened? Aren't we to get a heads up i.e. an email. I am sure I wasn't the only one working on other projects. Some kind of a notice would given me a chance to decide. It does seem like everyone who was reading stock articles bailed out of UA today. I am looking at my UA stock that lost half it's value in less than a day.

  • Report this Comment On July 10, 2012, at 10:13 PM, RobGati wrote:

    The stock split 2 for 1 today.

  • Report this Comment On July 22, 2012, at 5:10 PM, crca99 wrote:

    Thx for article. I will evaluate my position in UA immediately.

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: 1936718, ~/Articles/ArticleHandler.aspx, 11/20/2014 9:44:36 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