Under Armour, Overpriced?

Under Armour (NYSE: UA  ) reported fourth-quarter earnings yesterday, and the crowd went wild.

After announcing sales gains of 36% and a 47% increase in earnings per share, the stock took off on a tear, dashing ahead 11%. It didn't hurt that management boasted that on top of 2010's fantastic performance, it aims to grow revenue another 26% this year. But are there signs that Under Armour might be coming unlaced?

Amid all the hoopla, few investors are worrying about that today. And why should they? The headline numbers look simply terrific, besting the 10% revenue growth and 22% rise in profit that Nike (NYSE: NKE  ) reported last quarter, Deckers' (Nasdaq: DECK  ) low-to-mid-20s performance on sales and profit, and even the astounding revival in profit (up 38%) at Timberland (NYSE: TBL  ) . If shoe sales were hot across the board last year, nobody lit the court on fire like Under Armour.

So why am I still raining on UA's parade?

A short's lament
Full disclosure here, right up front: I am short Under Armour by way of put options. And nothing that Under Armour told us yesterday convinces me that I'm wrong to do that. To the contrary, two key numbers still tell me the stock isn't worth what investors are paying for it.

First off, free cash flow: Under GAAP accounting standards, Under Armour earned $68.5 million last year, 46% better than the year before. Good for them. The problem is that free cash flow moved the other way. The $20 million in cash that UA generated last year was less than one-third its net "profit." It was an 80% decline from what UA generated in 2009.

Second, inventories: One reason why cash generation lagged "income" is that, although Under Armour grew its sales 24% last year, grew sales even faster in Q4, and promises to exceed the full-year 2010 growth rate in 2011, its inventories of unsold goods are growing faster than any of those numbers. UA ended 2010 with 45% more unsold goods than it began the year with (accounts receivable also swelled 29%.)

Discussing his company's results on CNBC yesterday , Under Armour CEO Kevin Plank dismissed these quibbles with the comment: "No one ever has inventory figured out, you get better at it. And particularly for us, we're dealing with a much different company today ... than we were just a couple years ago."

I couldn't agree more. Two years ago, Under Armour was cheap, generating 50% more cash from its business, yet selling for a share price less than half what it costs today. Today, Under Armour is overpriced.

Fool contributor Rich Smith is short Under Armour by way of put options. The Motley Fool has a disclosure policy.

Under Armour is a Motley Fool Rule Breakers pick. Nike and Timberland are Motley Fool Stock Advisor choices. Under Armour is a Motley Fool Hidden Gems selection. The Fool owns shares of Timberland and Under Armour.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.


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  • Report this Comment On January 30, 2011, at 6:16 AM, sydisquid wrote:

    The percentage 80% drop in cash flow from net sales from 2010 compared to 2009 is due to what exactly? Too much inventory? Or other expenses that aren't accounted for? Exactly why is this proportional drop occurring? Please elaborate. You infer that it is to too much inventory. This isn't the first time they haven't had good turnover in inventory and was a question mark in 2009.

  • Report this Comment On January 30, 2011, at 9:24 AM, Merton123 wrote:

    The benefit cost analysis of shorting a stock. Will the price of the stock fall within the time period of the short? The real questions that I would be asking: Does the sales growth of the product appear sustainable? Who are the competitors? What are the competitors doing in response to this business gaining market share? How has this business differentiated its products from its competitors? The answer to these questions will help an investor decide to either go long on this investment or invest elsewhere.

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