Until very recently, Under Armour (NYSE:UA) (NYSE:UAA) was one of the fastest-growing stocks on the market, having counted almost seven straight years of 20% or better sales growth. That streak ended in dramatic fashion in early 2017, when the sports apparel retailer announced surprisingly weak fiscal fourth-quarter results.
Wall Street has responded by sending shares to their lowest point in over a decade. That could spell opportunity for investors who believe Under Armour will bounce back to robust growth. On the other hand, the operating and financial challenges it faces add significant risk to this investment.
A business in flux
Under Armour's operating trends have been deteriorating for over a year. Sales growth last quarter was 7%, compared to 11% in the prior quarter. Under Armour managed a 30% growth pace as recently as 2016. Profits are headed in the same direction, with operating margin slumping to 8% from 11% in early 2015.
The main risk to investors is that additional surprising declines are on the way. After all, it wasn't long ago that management was predicting 20% annual sales growth through 2018 as operating income improved by 15% annually. Both of these goals were dramatically lowered following a tough holiday quarter outing.
The good news is that Under Armour hit its most recent operating forecasts. In late April, CEO Kevin Plank called the first-quarter results "a solid start" to the year as revenue rose 7% and gross profit margin slipped by less than a percentage point, to 45% of sales. Executives affirmed their full-year forecasts on both the top and bottom lines. If Under Armour achieves these goals, it will at least show that the business has stabilized and management has regained its handle on broader industry trends.
Betting on a rebound
By purchasing the stock now, investors are betting that Under Armour's growth story hasn't been hobbled by the latest downturn. After all, the retailer has good company in its struggle within the industry. Nike (NYSE:NKE) was the Dow's worst-performing stock last year thanks to some of the same operating issues that hurt Under Armour, including declining shopper traffic at stores over the holidays.
Both companies predicted rough short-term results ahead but see the challenges as attractive opportunities. Both Nike and Under Armour have affirmed their bullish long-term outlooks, too. "Our brand is truly stronger than it's ever been," Plank told investors in January, "and we are actively managing for growth."
Under Armour brings powerful weapons to this recovery fight, including a quality management team, the potential for significant international growth, and the fastest-growing brand in the sector over the past two decades. Depending on your valuation metric, investors are either being offered these assets at a solid discount, or a worrying premium.
Under Armour is priced steeply when it comes to earnings, at over 50 times the prior year's profits compared to Nike's P/E of 22. On the other hand, the stock looks cheap on a price-to-sales basis, with its 1.85 multiple representing its lowest since 2010 and a significant discount to Nike's 2.64.
That valuation gap makes sense if you believe Under Armour will continue to struggle at a weak growth pace again even as its profitability remains stuck in the single digits. Investors who disagree might have a solid long-term bet on their hands -- if they can be patient during the volatility that will likely come with any rebound.
Demitrios Kalogeropoulos owns shares of Nike and Under Armour (A and C shares). The Motley Fool owns shares of and recommends Nike and Under Armour (A and C shares). The Motley Fool has a disclosure policy.