Under Armour (UA 0.16%) (UAA 0.31%) recently posted its first-quarter earnings, which beat expectations on the top and bottom lines. Its revenue rose 2% annually to $1.2 billion, narrowly beating expectations by $20 million. Its gross margin improved 100 basis points annually to 45.2%, and it generated $22.5 million in net income, compared to a loss of $30.2 million a year ago. Its adjusted EPS of $0.05 per share cleared estimates by a penny.
On that news, Under Armour's stock initially rallied as its stabilizing sales growth and improving profitability impressed investors. However, I still think investors should avoid this athletic apparel and footwear stock. Here are five reasons why:
Image source: Under Armour.
1. UA still struggles in North America
Under Armour generated 70% of its sales from North America during the first quarter. However, that core business posted negative sales growth over the past three quarters:
|
North America |
Q1 2018 |
Q2 2018 |
Q3 2018 |
Q4 2018 |
Q1 2019 |
|---|---|---|---|---|---|
|
Revenue |
$868 million |
$843 million |
$1.1 billion |
$965 million |
$843 million |
|
YOY growth |
0% |
2% |
(2%) |
(6%) |
(3%) |
YOY = Year-over-year. Source: UA quarterly reports.
The unit is struggling with excess inventory, fierce competition from Nike (NKE 0.24%) and Adidas (ADDYY 0.06%), waning interest in its flagship Curry shoes, and several poorly received designs.
The brand was also arguably tarnished by CEO Kevin Plank's praise of President Trump in 2017, which alienated many of the company's endorsers and customers, and earned jeers from Nike spokesman Kevin Durant.
Piper Jaffray's latest "Taking Stock with Teens" survey, which polled 8,000 U.S. teens regarding their favorite brands, ranked Nike, VF's Vans, and Adidas as their three top footwear brands, in that order. Under Armour failed to crack the top five. UA expects the North American business to keep struggling with "relatively flat" growth for the full year.
2. UA can't counter Adidas or Nike
One major headwind which UA seldom mentions is the growth of Adidas in North America. Adidas' North American revenue rose 3% annually on a constant currency basis during the first quarter, on top of its 21% growth in the year-ago quarter.
Adidas is reaping the rewards of a five-year turnaround plan it started in 2015. That plan focused on streamlining Adidas' supply chain, expanding its e-commerce platform, entering more urban markets with more brick-and-mortar stores, and landing big sponsorship and design deals with celebrities like Kanye West, Lionel Messi, and Beyoncé. It's also locking in athletes with its foam-soled UltraBoost shoes.
Nike's North American sales also rose 7% annually on a constant currency basis last quarter. Like Adidas, Nike is also executing a multi-year turnaround plan which expands its direct-to-consumer channels and product offerings in North America.
Under Armour lacks any meaningful ways to combat Adidas and Nike's aggressive plans, and it will likely keep losing ground to both rivals.
Image source: Adidas.
3. Mediocre overseas growth
Under Armour bulls claim that the growth of the company's overseas business will offset the weaker growth of its North American business. However, its international unit simply isn't growing fast enough to become the company's core growth engine.
|
International |
Q1 2018 |
Q2 2018 |
Q3 2018 |
Q4 2018 |
Q1 2019 |
|---|---|---|---|---|---|
|
Revenue |
$289 million |
$302 million |
$351 million |
$395 million |
$328 million |
|
YOY growth* |
19% |
24% |
17% |
28% |
17% |
YOY = Year-over-year. Source: UA quarterly reports. *Constant currency terms.
In fact, Under Armour expects the unit's revenue growth to decelerate and only rise by a "low double-digit percentage" for the full year, compared to 22% constant currency growth in 2018.
4. Vague turnaround plans
During the conference call, Plank highlighted UA's sponsorship deals with the NCAA, HOVR foam-soled shoes, the optimization of its innovation, design, supply chain, marketing and sales efforts, and an expansion into India as potential catalysts.
Plank also claimed that UA would "emerge in 2019 as an even stronger brand and company for our consumers, customers and shareholders." However, I think those turnaround plans are too vague and fail to address the two elephants in the room -- Adidas and Nike.
5. A ridiculous valuation
For 2019, Under Armour expects its revenue to rise 3% to 4% as its adjusted EPS improves 22% to 26%. But at $22, the stock trades at over 60 times that earnings estimate.
Wall Street expects UA earnings to rise by about 41% next year. Based on that forecast, UA still trades at nearly 50 times forward earnings. Those ratios indicate that UA is far too pricey relative to its growth potential.
UA will never be the next Nike or Adidas
Under Armour was once widely dubbed the next Nike or Adidas. Unfortunately, its growth is peaking, and it's being cornered by those two larger rivals. Under Armour isn't doomed, but its high-growth days are over and it's still being valued like a growth stock.
