In this Market Foolery segment, Mac Greer welcomes Andy Cross and Matt Argersinger to the show to talk about what went wrong last quarter for Under Armour (NYSE:UA) (NYSE:UAA) as a tepid holiday season plagued the brick-and-mortar retailers that distribute the company's athletic apparel. The report proved to be a real outlier compared to Under Armour's previous growth history -- where can we expect the company to go from here?
A full transcript follows the video.
This video was recorded on Jan. 31, 2017.
Mac Greer: Guys, let's get right to it. We've got lots of earnings news and I want to start with Under Armour. Matt, the stock just getting shellacked on Tuesday [stock is down over 25% since the report]. Weaker than expected earnings and the company announcing that its CFO was leaving because of personal reasons.
Matt Argersinger : Shellacked is definitely the right word. Anytime you're, you've guided for revenue growth of 20% and it comes in at 12%, and then you guide for the following year of growth of 11% to 12% when you're also expecting 20%, or at least the market's expecting 20%, it's not gonna be a good day for your stock. And so when I look at Under Armour, what we have to remember, this is still very much a retail story. In other words, about 60% of Under Armour's revenue still comes from wholesale sales to department stores, to sports retailers, and it was a really bad holiday season for department stores and in-store retail sales.
I looked at this report from Kiplinger that in-store sales for this past holiday were up just 1.4% year-over-year, which is a pretty anemic growth rate for retail sales. And so we also know that obviously traditional retail faces a lot of structural headwinds, and so anytime you have slower traffic to department stores, that's gonna force a lot of promotional discounting, retailers are trying to move a lot of inventory through, and what happened with Under Armour is there was a lot of discounting. Kevin Plank at least thinks that a lot of Under Armour's brand sort of got shuffled in with the other competitor brands, a lot of discounting, not a lot of sell-through, and therefore, you see the results that we see today.
And especially, we gotta also remember that about 85% of Under Armour's sales still come from North America. They're growing great overseas, but North America was a really weak retail market and that's what we see with Under Armour's results.
Greer: And we had some big retailers like Sports Authority go bankrupt over the last year. How much were they hurt by that, you think?
Argersinger: I don't think . . . that hurt a little bit, but I remember that was probably in the single-digit percentage points. They've kind of moved past that, but still, it's a factor and I think Kevin Plank also mentioned in the conference call that they expect to get a lot of that volume back, that they necessarily didn't in the fourth quarter.
Andy Cross: You know I thought the pollsters had a bad forecasting year with Brexit and the U.S. election, but I gotta say, Matt and I were talking about this before the show. It just seems like Under Armour missed the forecasting mark pretty dramatically here. I think we've been thinking about this retail shift that's been going on and I just think that's just, when I think of Under Armour in this kind of quarter, especially around the holiday sales, and what they're looking out for 2017. They did miss the mark and I was just wondering if it's a consumer shift or if it's really just a forecasting miss on their part.
Argersinger: Right, back in October, so this is October, this is right before getting into the holiday season and they were confident with their guidance, they thought they were gonna have a good holiday season, certainly guiding to 20% growth, and we were kinda also talking about the show, maybe this is why the CFO suddenly is leaving. Maybe there was some, just sort of missing the picture, like you said about what the retail environment really looks like.
Greer: And taking a longer view, guys, Under Armour is a Motley Fool recommendation. They've delivered 26 straight quarters of 20% or higher sales growth up until this most recent quarter. And shares have been a really market crusher over the past five and ten years, right?
Cross: From a growth investing perspective, the 20% sales, 20% revenue, those are beauty and usually, typically, the market underestimates those. So you think about investors, typically, Peter Lynch has written about this, underestimate those true growers as long-standing growth players. It's just that, when it sours and when it goes south, investors tend to flee the ship pretty quickly and dramatically.
Greer: And we got a couple of questions on Twitter from some longtime listeners. Brendan asking whether this is a overreaction or a real concern and Sam asking whether this is a buying opportunity.
Argersinger: Those are two great questions. I can't call it an overreaction, because this is a pretty dramatic slow-down. We talked about consistent 20% growth, now we're in the low double digits. Cross, you had an interesting number I think. The $2 billion in market value that Under Armour's losing this morning or today is equivalent to what, you said five years worth of operating profits?
Cross: Yeah, maybe like $400 million in operating profits on $4 billion of sales, so yeah, you're looking at about five years of operating profits out the window in less than a day.
Argersinger: But you also have to say, if you were an investor and you were looking for this company to grow at a 20% rate for the next several years, it's a totally different trajectory today going forward. And the question is, can they get back to that growth? They must, if they want to justify the valuation on the stock, which is still, which was high going in and it's still actually relatively high, even after losing 20% to 25% in the stock today. So I don't think it's an overreaction. I don't feel like this is an opportunity where you say I'm backing up the truck on this company. I think you have to be a little cautious. Maybe if you had a small position you were looking at, this might be a great time, but I wouldn't be the person who says I gotta go in 10% of my portfolio in Under Armour today on this miss.
Cross: You know, also part of this, Matt, is I think is Kevin Plank was very honest about the assessment, but when you look at what happened with Fitbit earlier this week, I mean the whole idea of consumerables and the amount of investments that Under Armour has made into the wearable market, they've spent $700 million in the past couple years I think, in kind of buying and going into the technology field. But concerns about the athletic market, what is the real growth potential behind that?
Greer: Connected fitness, Andy.
Cross: Connected fitness, but is it more of a trend? So I think investors are pairing these all together and thinking about the retail space, as well as the athletic space that Under Armour and Nike play into and wondering is the growth days, especially in North America, have they kind of slowed down?
Greer: Well let's talk about that as we wrap up this conversation. Matt, Under Armour right now has a market cap of around $9 billion and falling. Nike has a market cap of around $90 billion, so we've got $9 billion and $90 billion. If I'm an investor in Under Armour or if I'm looking at this as a potential investment, should I be thinking of Under Armour as just an early stage Nike or is that really kind of an apples and oranges comparison?
Argersinger: That's a great question. I like the comparison. In fact, my team in MDP, when we were looking at Under Armour, the past several months, we've compared it to Nike, looking at Nike as a public company over the last three decades, roughly. And it's interesting, if you look at Nike's history, Nike would have periods where its, year on and year end the growth is 25%, 30%. And all of a sudden, they'll have a year where growth slows down to 10% or even falls, revenue even falls. And you can go back and understand the explanation for it, but in reality, what you have is an interesting picture of a company that, over the last 20 years, has done exceptionally well for investors, Nike has. It's followed a very volatile trajectory, it's had years like this where all of a sudden 25% growth turned into 12% growth.
And so if you're a long-term shareholder in Under Armour, I think you can take confidence in that and say you know what, maybe this is a company that's just going through some early growing pains, it can still be on that sort of $90 billion future market cap trajectory like Nike.
Cross: And let's not forget Nike does most of their sales internationally, Under Armour does almost all, as Argersinger says, 85% of the sales domestically, so Under Armour has a lot of potential around the globe, which is that the margins there aren't quite as strong as they are in the US.
Andy Cross owns shares of Under Armour (A Shares) and Under Armour (C Shares). Matthew Argersinger owns shares of Twitter and Under Armour (C Shares). Matthew Argersinger has the following options: long January 2018 $25 calls on Twitter. The Motley Fool owns shares of and recommends Fitbit, Nike, Twitter, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.