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3 Reasons Under Armour Inc. Stock Could Keep Falling

By Demitri Kalogeropoulos – Jun 11, 2017 at 12:00PM

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There's room for more declines ahead for the struggling sports apparel specialist.

Under Armour (UA -7.70%) (UAA -7.73%) shares reflect plenty of pessimism on the business right now. The former Wall Street favorite is one of the worst-performing stocks on the S&P 500 since last June, mainly thanks to the fact that its sales growth pace has been cut in half.

If you believe management, the slowdown is just a temporary setback that's part of a brighter long-term growth story. "Our brand is truly stronger than it's ever been," CEO Kevin Plank told investors back in January "and we are actively managing our growth."

Yet the stock could still have further to fall. Here are a few trends that might push shares even lower.

Another growth surprise

Under Armour's sales growth pace has declined from over 20% to below 10% in the past year. It has good company in this industrywide struggle, given that Nike (NKE -2.17%) is posting weaker sales, too.

A jogger stops for a drink of water.

Image source: Getty Images.

But the biggest problem with the slump was how it caught the management team completely by surprise. Executives in late October noticed weakening trends in the industry but said weren't much concerned about them. Instead, Under Armour reiterated both its 2016 forecast and its long-term sales growth outlook that called for gains of over 20% through 2018. Three months later, that story had changed dramatically and executives lowered their expansion pace outlook to between 11% and 12%.

Under Armour repeated its 2017 forecast in late April even though sales growth slowed again -- this time to a 7% pace. If trends don't improve and management is forced to lower its expectations for a second time, investors probably won't give the retailer much slack and the stock will likely drop.

Slumping margins

The rebound strategy is focused on placing Under Armour's products firmly on the premium side of the industry. This is important because, as the company learned over the holiday period, retailers have been under intense pressure to cut prices lately as they fight over a shrinking pool of shoppers that are hunting for deals. Innovative, branded apparel and footwear products aren't as susceptible to deep discounting, and so Under Armour is making changes across its portfolio, marketing, and retailer partnerships to better position itself outside of the discount rack. "The role both we and our retailers expect us to play is as a premium full price brand," Plank explained to investors in January.

We'll know if this strategy is working by keeping a close eye on profitability. Gross margin recently hit a new low for Under Armour and has nearly dropped below Nike's figure for the first time.

UA Gross Profit Margin (TTM) Chart

UA Gross Profit Margin (TTM) data by YCharts.

Part of this decline is good news because it is driven by growth in the lower-margin footwear segment. However, the company still needs to show improving pricing power over the next few quarters or it risks losing its status as a premier sports apparel brand.

Scaling back plans

The stock could fall some more if management decides to scale back its ambitious expansion plans. Plank and his team have good reasons to plow investments into international growth in particular, given that the U.S. is responsible for 85% of its sales, compared to less than 50% for Nike. The retailer also needs to spend heavily to build up its e-commerce infrastructure and to expand deeper into the footwear segment.

Yet these are expensive priorities that are straining Under Armour's resources right now. The company is on track to lose money through the first half of 2017 but aims to generate operating income of $320 million for the full year to mark a 23% drop from last year's result. Continued big declines like that would require scaling back its growth initiatives, which might further harm its market position.

Demitrios Kalogeropoulos owns shares of Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool owns shares of and recommends Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.

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