It's been a rough week for Under Armour (UAA 2.29%).
The high-flying sports apparel stock is now sitting at a two-year low after it cut its revenue forecast in its earnings report last week. The stock is now down more than 40% from its 2015 peak. Shares dropped 13% the day of the report, and have since given up another 7%.
On the earnings call, management said that revenue growth would slow to 20% in the fourth quarter, but it expected to reach the 2018 goal of $7.5 billion in revenue it outlined at its Investor Day conference in 2015. However, the market was dismayed by the company's decision to pull back from a 2018 operating income forecast of $800 million as the company said that it was making investments to "get big fast," which would mean that profits would grow more slowly than revenue. While the company expects revenue growth in the low 20% range over the next two years, it only sees operating income growth in the mid-teens, meaning that operating income may only be in the $600-million range by the end of 2018.
Considering that sizable cut in guidance, the market's reaction may not be surprising. Under Armour already cut its guidance once this year when Sports Authority, a key wholesale customer, declared bankruptcy, and the stock's lofty P/E ratio, still near 70 after the recent slide, means investors have high expectations. Still, this is a company that has grown revenue by 20% or more for 26 straight quarters. Ignoring the long-term prospects and impact of the upcoming investment seems foolish.
While Under Armour is still much smaller than its two main rivals, Nike (NKE 1.23%) and Adidas (ADDYY 1.81%), the company has shown after several years of strong growth that it can compete with anyone. Its roster of sponsors includes the reigning MVPs in the NFL and NBA, Cam Newton and Stephen Curry, as well as baseball's reigning National League MVP, Bryce Harper. Additionally, it counts big names like 2015 Masters champion Jordan Spieth and 2016 Wimbledon champ Andy Murray wearing its gear.
But comparing Under Armour's financials to Nike's, the global leader in sports apparel, two notable differences stand out. While the majority of Nike's revenues come from footwear and from outside of North America, Under Armour is the opposite, deriving most of its sales from North America and apparel.
Not surprisingly, the company sees footwear and international as its two biggest growth opportunities. Thus far, this year international sales have jumped 67%, and were up 74% last quarter, while footwear jumped 54% through the first nine months of the year and 42% in the last quarter.
Stephen Curry's success represents a particularly strong opportunity as basketball is one of the biggest categories in sneakers and a popular NBA player can move a lot of shoes, as the success of Nike's Jordan brand has shown. In fact, the launch of the Curry One and Two has been a key driver in Under Armour's footwear sales lately, which have accelerated over the last two years. On the earnings call, CEO Kevin Plank said a recent brand tour with Curry in China helped build excitement for the brand, and that sales growth in China, arguably the company's biggest opportunity, is starting to take off, with sales expected to double from $80 million a year ago.
It's understandable that investors would be disappointed with the lower operating income guidance, but management is making the right decisions for the long-term health of the company. Footwear is currently a lower-margin business for Under Armour, so a shifting sales mix toward footwear will cut into profit growth as it builds out that business. Similarly, investments in international and connected fitness will also cost the company on short-term earnings.
But those investments should pay off over time. As Nike's success shows, the opportunity in footwear and international markets is huge. Despite the slower short-term profit growth, Under Armour still has a long growth path ahead of it.