The Real Reason Under Armour Is Falling

Under Armour is doing materially better than competitors such as Nike and lululemon athletica, but the stock is crashing after the recent earnings report. Buying opportunity or reason to sell?

Apr 25, 2014 at 8:00AM

Ua

Source: Under Armour.

Under Armour (NYSE:UA) was falling by more than 7.5% on Thursday after reporting earnings for the first quarter of 2014. The numbers were actually better than expected, and the company is clearly outgrowing competitors such as Nike (NYSE:NKE) and lululemon athletica (NASDAQ:LULU) by a considerable margin. What's the reason for the decline? Perhaps more important: What should investors do about it?

Running at full speed
Revenues during the first quarter of 2014 increased by an impressive 36% year over year, to $642 million versus $472 million in the first quarter of 2013. This was above Wall Street estimates of $599 million on average for the period.

Sales were strong across the board: Apparel sales increased 33% to $459 million; footwear revenues grew 41% to $114 million; and accessories sales jumped 43% to $52 million.

The direct-to-consumer segment represented a big 26% of total sales during the period, and it delivered an increase of 33% versus the prior year. International sales are still relatively small at 9% of sales, but firing on all cylinders with a whopping increase of 79% year over year.

While many other companies in the apparel business are implementing big discounts to sustain sales volumes, Under Armour remains remarkably strong on the pricing front: Gross margin increased to 46.9% compared with 45.9% in the prior year's quarter.

The combination of rapidly growing sales and expanding profit margins produced a big increase of 71% in diluted earnings per share, to $0.06 during the quarter. The number was comfortably better than the $0.04 per share forecast on average by Wall Street analysts.

Management sounded quite pleased with Under Armour's performance during the quarter, and the company raised its guidance for both sales and operating income during 2014.

Beating the competition
The level of performance Under Armour is delivering is not only quite impressive on a stand-alone basis, but also materially better than the growth rates generated by competitors such as Nike and Lululemon.

Nike is a rock-solid industry leader with tremendous scale and marketing power; however, it's hard for a company of Nike's size to grow as quickly as Under Armour. During the quarter ended on Feb. 28, Nike reported an increase of 13% in revenues to $7 billion, while future orders were up by 12% versus the prior year.

This is quite a strong performance for a company that is 10 times bigger than Under Armour in terms of sales; however, Nike is still no match for Under Armour when it comes to growth.

Lululemon is in a very different situation. The company is trying to recover its image from quality problems and public-relations scandals. Even if things seem to be clearly improving lately, Lululemon is still behind both Nike and Under Armour when it comes to recent growth rates.

Lululemon reported an increase of 7% in sales during the quarter ended on Feb. 2, to $521 million, which was better than the $514.9 million forecast on average by Wall Street analysts, and an improvement versus previous quarters. On the other hand, comparable-store sales decreased by 2% on a constant-dollar basis during the period.

A victim of its own success
Under Armour is arguably the most explosive growth story in the sports-apparel industry during the last several years. The company has generated formidable growth rates over time, and both analysts and investors seem to be getting used to outstanding financial performance.

When comparing valuation ratios for Under Armour versus peers such as Nike and lululemon, the company trades at a considerable premium. Under Armour carries a forward P/E ratio of nearly 45 times earnings estimates for 2015, versus 22 for Nike and 21 for Lululemon.

Under Armour most certainly deserves a premium valuation due to its extraordinary performance, but the reaction to the earnings announcement may be indicating that some investors probably got ahead of themselves when it comes to expectations.

Performance was remarkably strong during the quarter, the company is clearly outgrowing the competition by a wide margin, and management raised guidance for the rest of the year. If some investors are feeling disappointed, this seems to be related to excessive expectations as opposed to insufficient performance.

Bottom line
Under Armour is firing on all cylinders, outperforming the competition, and generating growth rates that are truly exceptional for a company in its industry. The recent decline seems to be related to excessive expectations prior to the earnings report, and not to a shortfall in performance. If anything, the dip in Under Armour could present a buying opportunity for investors.

Innovation can make you rich
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends lululemon athletica, Nike, and Under Armour. The Motley Fool owns shares of Nike and Under Armour. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers