Shares of Under Armour (NYSE:UAA) (NYSE:UA) rallied 17% on Feb. 13 after the athletic footwear and apparel maker posted decent fourth quarter numbers. However, both classes of UA stock remain down about 20% over the past 12 months, and there are still plenty of concerns about its long-term growth.
Let's discuss UA's improvements and shortcomings during the quarter to see if the stock is ready to run or set to stumble again.
What went right for Under Armour
Under Armour's revenue rose 5% annually to $1.37 billion during the quarter, beating estimates by $60 million and marking a reversal from its 5% drop in the third quarter.
Apparel revenues rose 2% annually to $952 million as strong sales of men's training and soccer apparel offset softer demand for team sports and outdoor apparel. Footwear revenue rose 9% to $246 million as the strength of its running shoes offset weaker demand for its team sports and basketball shoes. Accessories revenue increased 6% to $111 million, led by sales of men's training and running equipment.
Strong overseas demand -- with 45% growth in the EMEA (Europe, Middle East, and Africa) region, 56% growth in the Asia-Pacific region, and 36% growth in Latin America -- offset a 4% drop in North American sales. UA's direct-to-consumer revenues also rose 11% and accounted for 42% of its global revenues, which offset a 1% dip in its wholesale revenues.
Under Armour's layoffs, retreat from wearable devices, and cost restructuring efforts (which should save at least $75 million annually starting in 2019) all stabilized its bottom line declines. Its adjusted earnings came in at $0.00 per share, which matched estimates but still marked a huge drop from its EPS of $0.23 per share a year earlier.
What went wrong for Under Armour
Unfortunately, soft demand for UA's basketball shoes and its weakness in North America still go hand in hand. That's troubling, because the North American market generated 75% of the company's revenues last quarter.
UA's multi-million dollar contract with Steph Curry is often overshadowed by Nike's (NYSE:NKE) flashier marketing campaigns with heavy hitters like LeBron James and Kevin Durant. Its flagship Curry 4 was also dogged by manufacturing delays and lackluster reviews, which led to the resignation of footwear chief Peter Ruppe late last year.
UA often blamed the bankruptcy of Sports Authority for its slump in North America, yet Adidas (NASDAQOTH:ADDYY) -- which has been gaining ground against both UA and Nike -- posted 23% annual sales growth in that "tough" region last quarter.
Most of UA's overseas growth also didn't trickle down to its bottom line. Although its EMEA operating income rose 30%, its operating income in the Asia-Pacific and Latin America regions declined, with the latter posting a wider operating loss.
During the conference call, Cowen analyst John Kernan pointed out that two of UA's "biggest competitors" (likely Nike and Adidas) "generate operating margins north of 30%" in China. By comparison, UA's operating margin in the Asia-Pacific region fell from 17.5% to 10.5% between the fourth quarters of 2016 and 2017.
UA's total inventories rose 26% annually to $1.2 billion during the quarter. It rose by a "mid-teen percentage" in North America, and 50% overseas. The jump in overseas inventories isn't a major concern, since it's supported by solid sales growth. But rising inventories in North America remain challenging, and indicate that the region's operating margin -- which was negative last quarter -- could stay negative for the foreseeable future.
UA expects to earn $0.14 to $0.19 per share for fiscal 2018. That misses the consensus estimate of $0.20 and represents negative to flat growth from 2017. The company also remained quiet about its prior target of generating $7.5 billion in revenues by 2018, while analysts expect its revenue to rise just 2% to $5.1 billion this year.
The verdict: A false start for Under Armour
UA certainly made improvements during the quarter, but its core North American business remains a mess, its overseas growth is weighed down by declining margins and currency headwinds, and it hasn't demonstrated an ability to keep up with Nike and Adidas in key markets like China.
To top it off, both classes of the stock remain pricey at about 50 times earnings. Therefore, I expect UA's post-earnings pop to fizzle out instead of leading to sustainable gains.