Shares of Under Armour (NYSE:UA) (NYSE:UAA) recently rallied after the company's fourth quarter numbers topped analysts' expectations. Its revenue rose 2% annually (3% on a constant currency basis) to $1.39 billion, beating estimates by $10 million.

Its adjusted gross margin expanded 160 basis points annually to 45.1%, and it reported an adjusted operating profit of $40 million, compared to a flat operating profit a year earlier. Its adjusted earnings of $0.09 per share beat expectations by a nickel.

An Under Armour ad campaign.

Image source: Under Armour.

UA beat Wall Street's low expectations, and its growth seems to be stabilizing. For the full year, UA expects its revenue to rise 3%-4%, compared to its 4% growth in 2018 and 3% growth in 2017. However, it still expects its North American revenue to come in flat for the year, which indicates that it's still struggling in its biggest market.

Check out the latest Under Armour earnings call transcript.

Why is Under Armour struggling in North America?

UA was once considered the "next Nike (NYSE:NKE)" in North America, but the bankruptcies of a couple major sportswear retailers and new expansion efforts by Nike and Adidas (OTC:ADDYY) derailed its growth.

UA's flagship line of Curry shoes (endorsed by NBA star Steph Curry) lost their momentum with poorly received designs, and CEO Kevin Plank alienated the brand's spokespeople and customers by praising President Trump. Here's how UA fared in North America over the past year.

North America

Q1 2018

Q2 2018

Q3 2018

Q4 2018


$868 million

$843 million

$1.1 billion

$965 million

YOY growth





Source: UA quarterly reports.

For the full year, UA's North American sales fell 2% to $3.7 billion, or 71% of its top line. That represents a slight dip from 76% in 2017, and indicates that UA needs to grow its international businesses more aggressively to offset that weakness.

During the conference call, COO Patrik Frisk stated that the North American business was "at a point of stabilization" with a "cleaner and tighter" inventory. Frisk noted that UA pricing and promotional activities were "normalized at lower levels than just two years ago."

CFO Dave Bergman stated that UA cut its promotional activity in North America by "about one-third" compared to 2017, which "created a more difficult comp in the second half of the year." Bergman mainly attributed the region's 6% sales decline to the contraction of UA's wholesale business and lower sales to its off-price channel. In other words, UA cut its promotions to protect its brand appeal and margins, but those strategies impacted its sales growth.

How are Under Armour's rivals faring?

In previous years, UA blamed its North American woes on the saturated footwear market and retailer bankruptcies. However, most of UA's rivals generated stronger growth in North America in their latest quarters.

A woman shops for sneakers.

Image source: Getty Images.

Nike's North American revenue rose 9% annually last quarter, as its footwear and apparel revenue rose 8% and 10%, respectively. Adidas' North American revenue climbed 15% last quarter. Skechers (NYSE:SKX), which avoids direct competition with those athletic footwear makers, grew its domestic sales 4% annually last quarter.

Simply put, Under Armour is underperforming its main footwear rivals, and it can't blame industrywide issues anymore. Younger shoppers also aren't drawn to the brand anymore. In Piper Jaffray's latest "Taking Stock With Teens" survey, U.S. teens ranked Nike, VF's Vans, and Adidas as their three favorite footwear brands, in that order. Under Armour didn't crack the top five.

The road ahead

Looking ahead, Under Armour will likely struggle to counter Nike and Adidas' aggressive direct-to-consumer expansion strategies, which include new brick-and-mortar stores, e-commerce expansions, and marketing blitzes.

The growth of UA's international business looks promising, but it's simply not big enough to offset the company's problems in North America yet. UA expects its home market's sales to stabilize this year, but I think it could be tough to counter the competition from Nike and Adidas while expanding its gross margins.

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