Under Armour (NYSE:UAA) (NYSE:UA) has declined nearly 20% over the past 12 months due to concerns about its slowing sales growth, declining margins, high valuations, and fierce competition from bigger rivals like Nike (NYSE:NKE). But even after that slump, UA still trades at 34 times earnings, compared to the industry average of 27 for apparel makers.

Image source: Under Armour.

UA's sales rose 27.6% annually last quarter, but that represented a slowdown from 30.4% growth in the previous quarter and 28.5% growth in the prior year quarter. On the bottom line, UA posted a loss of $0.12 due to the bankruptcy of retailer Sports Authority and the payment of a special dividend to Class C shareholders to settle a class action lawsuit. UA is also expected to boost its marketing spend significantly to keep pace with high-profile rivals like Nike and Adidas. To top that off, UA CEO Kevin Plank recently disclosed that he would sell up to 2.1 million of his non-voting Class C shares over a nine month period starting in October.

These red flags all indicate that Under Armour isn't a great buy at current prices. Instead, investors should check out two of UA's more reasonably priced peers: Nike and VF Corp (NYSE:VFC).

Nike: Invest in Goliath instead of David

Shares of Nike have fallen 5% over the past 12 months, but the stock trades with a lower P/E of 27 and pays a forward dividend yield of 1.1%. Like UA, Nike has been weighed down by slowing sales growth and the bankruptcy of Sports Authority.

Sales rose 5.9% annually to $8.24 billion last quarter. That represented a slowdown from 7.6% growth in the previous quarter, but compared favorably to 4.9% growth in the prior year quarter. On a constant currency basis, Nike brand revenues rose 8% to $7.73 million, while Converse brand revenues rose 18% to $513 million. Robust overseas sales offset weaker demand in the North American market.

Worldwide futures orders rose just 11% on a constant currency basis, missing expectations for 13% growth. Gross margin contracted 30 basis points annually to 45.9% due to higher product costs, the clearing of excess North American inventory, and unfavorable foreign exchange rates. However, Nike's gross margin decline wasn't as steep as UA's 70 basis point decline to 47.7% last quarter. Nike's inventory rose 12%, but that was also better than UA's 30% jump in inventory last quarter.

Analysts believe that Nike will grow its revenues by 8% to $35 billion this year. Earnings are expected to rise 11% this year and grow at an average annual rate of 14% over the next five years. That forecast gives Nike a 5-year PEG ratio of 1.7, compared to UA's PEG ratio of 2.4 -- indicating that Nike is cheaper relative to its earnings growth potential than Under Armour.

Image source: Pixabay.

VF Corp: An unloved dividend aristocrat

VF owns a wide portfolio of major apparel and footwear brands, including The North Face, Timberland, Wrangler, Lee, and Vans. It's also a dividend aristocrat which has raised its dividend annually for over four decades. The stock currently trades at 24 times earnings and pays a forward yield of 2.5%.

VF shares have fallen 16% over the past 12 months due to weak sales growth. Revenue from continuing operations rose just 1% annually last quarter, compared to flat growth in the previous quarter and 5% growth in the prior year quarter. Outdoor & Action (Timberland, North Face, Vans) revenue rose 2% to $1.4 billion, Jeanswear revenue rose 3% to $629 million, and Imagewear (workwear and licensed sportswear) revenue improved 3% to $255 million. Unfortunately, those gains were mostly offset by a 19% decline in its Sportswear (Nautica, Kipling, and others) revenues to $115 million.

Earnings also fell 10% to $0.35 per share due to inventory management and foreign currency impacts. On the bright side, inventories rose just 6% annually during the quarter and gross margin improved 10 basis points to 48.1%, thanks to lower product costs, better pricing, and a more favorable product mix. VF recently divested three non-core brands (7 for All Mankind, Ella Moss, and Splendid) for $120 million, and could soon sell its licensed sports group. These moves should boost VF's cash flow and bolster its margins.

Analysts expect VF's sales to rise just 0.5% this year before improving 7% next year. Earnings are expected to improve 5% this year and grow 10% annually over the next five years, giving VF a price/earning to growth ratio of 1.8 -- which is comparable to Nike's and also lower than Under Armour's.

Slow and steady wins the race

I believe that Under Armour still has room to grow, but the stock seems too expensive relative to its growth potential. Therefore, investors might be better off sticking with mature footwear and apparel plays like Nike and VF Corp until UA stock cools down to more reasonable levels.


This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.