On Nov. 4, sportswear giant Under Armour (UA -3.37%) (UAA -4.21%) reported better-than-expected third-quarter earnings. The company reported adjusted earnings per share of $0.23 vs. expectations of $0.18. Its revenue totaled $1.43 billion vs. expectations of $1.42 billion. (The results were a bit down from the same quarter 2018 when it reported earnings per share of $0.25 and revenue of $1.44 billion.)
Despite these decent results, its stock sank as much as 15% after its report. (It reached $18.91 Nov. 1 before it reported its earnings, then plunged to $15.44 at closing Nov. 4. Shares of Under Armour have recovered slightly, closing at $17.57 on Nov. 11.)
Why investors have soured
There are four primary reasons investors are becoming bearish on Under Armour.
- Lower full-year revenue outlook
Under Armour cut its forecast for the full year. It previously expected growth in the range of 3% to 4%, but now it anticipates just 2% growth.
- Leadership changes
Last month, Under Armour announced that Kevin Plank, who founded the company 23 years ago, will step down as CEO on Jan. 1. Plank will take on the role of executive chairman and brand chief. He'll be replaced as CEO by Patrik Frisk, the chief operating officer. The company has had three chief financial officers since 2016.
- Revenue declines in North America
Under Armour reported revenue declines for the fifth straight quarter in North America, its biggest market.
- Pending federal investigations
The Wall Street Journal reported that the Securities and Exchange Commission and the Justice Department are looking at whether Under Armour tried to make sales look better than they were by shifting numbers between various quarters. In other words, it could be hit with charges of fraud.
Now that the dust has settled a bit from Under Armour's announcements and news of the investigations, what should investors think about Under Armour as an investment now?
Under Armour executives aren't discussing the details of the probes. But in a phone call with analysts, David Bergman, Under Armour's accounting chief, said, "We firmly believe that our past accounting practices and disclosures were entirely appropriate. And we've been fully cooperating for the past 2 1/2 years on this."
But the company now faces a shareholder lawsuit alleging that Under Armour executives misled investors by shifting sales between quarters. The class action complaint names Under Armour, Plank and three other executives, alleging violations of federal securities laws.
And The New York Times notes that the company has struggled against competitors like Nike (NKE -2.39%) and Adidas (ADDYY -0.87%), which have seen big gains from their moves into "athleisure" wear.
Under Armour was once a Wall Street star, reporting 26 consecutive quarters of 20%-plus revenue growth until it reported a steep drop during its fourth-quarter earnings announcement for 2016.
But because of the uncertainty around the outcome of the federal investigations, leadership changes, and its struggle to compete and restructure, it may be best to stay away from Under Armour for now as a long-term investment. Under Armour's higher trailing price/earnings ratio (P/E) of 63.51, compared to Nike at 33.47 and Adidas at 33.49, indicates it's not the best choice for investors looking to buy an undervalued stock. In terms of growth, the company's price-to-earnings growth ratio (PEG) is 1.32, similar to its peers: Nike's PEG is 1.84, and Adidas' comes in at 1.34. That indicates it's not the best choice for investors looking for growth, either.
Until more is known about the federal investigations and the shareholder lawsuit, investors would be best to sit on the sidelines.