Under Armour (UA +0.33%) (UAA +0.00%) was once hailed as the "next Nike (NKE +0.09%)," but the footwear and athletic apparel maker's stock has tumbled nearly 40% over the past five years as its growth decelerated. That's a painful drop, and I think that decline could continue in 2020 for four simple reasons.
1. Competition from Nike and Adidas
Under Armour is struggling to keep pace with Nike and Adidas (ADDYY +0.64%) in three key areas: North America, overseas markets, and direct-to-consumer (DTC) sales.
Under Armour's North American sales fell 4% annually last quarter, marking its fifth consecutive decline in a market that generated 71% of its revenue. Nike and Adidas reported 5% and 16% annual revenue growth in North America, respectively, in their latest quarters.
Image source: Under Armour.
UA's international sales grew 5% annually last quarter, but that barely offset the weak growth of its North American business. Nike posted double-digit sales growth across all its overseas markets last quarter, while Adidas posted double-digit sales growth across all its markets except Europe.
UA's DTC sales -- which come from its website, apps, and first-party stores -- fell 1% last quarter. Meanwhile, Nike's DTC revenue rose 17% on a constant currency basis last quarter, led by its 38% growth in digital revenue. Adidas' DTC revenue also grew by the double digits last quarter.
That competition caused Under Armour's double-digit revenue growth to drop to the low single digits in 2017 and 2018, and analysts expect just 2% revenue growth in 2019.
2. Two regulatory probes
Last November, the Wall Street Journal reported that Under Armour faced probes from the Securities and Exchange Commission and the Department of Justice regarding inflated revenue figures. The report claims that UA dumped inventories intended for factory stores to off-price retailers in the final days of each quarter in 2016.
That alleged move, which wasn't previously disclosed to investors, likely boosted UA's revenue and reduced its inventories at the expense of its gross margins. These probes could result in fines and force UA to restate its revenue over the past three years -- which would cause its multi-year slowdown to look even worse.
3. Management changes and unclear plans for the future
Under Armour's accounting issues might have been caused by the leadership of three different CFOs between 2016 and 2017. But that's not the only major management change over the past three years.
UA's chief designer Dave Dombrow resigned in early 2016 to work at Nike. UA rehired Dombrow later that year after its infamous "Chef Curry" disaster, but he failed to revive UA's flagship Curry shoes with new designs. UA then hired Kasey Jarvis, the former VP of Product and Design at Black Diamond Equipment, to replace Dombrow in early 2019. Founder and CEO Kevin Plank, who led the company for over two decades, also resigned on Jan. 1 and was succeeded by COO Patrik Frisk.
Image source: Under Armour.
All those management shifts raise troubling questions about UA's future. For now, UA's main strategy for 2020 is to cut costs and improve its gross margin, then invest any excess cash into fresh marketing campaigns. It isn't planning to enter the higher-growth athleisure market to challenge companies like Lululemon.
Those listless plans indicate that UA will likely continue to struggle against Nike and Adidas, which are both executing multi-year expansions with marketing blitzes and aggressive brick-and-mortar expansions into urban and overseas markets.
4. The stock's valuation
UA's revenue growth is sluggish, but analysts expect its cost-cutting efforts to boost its earnings 26% this year and 41% next year. At first glance, that growth rate seemingly justifies its forward P/E ratio of 45.
Yet I think that those forecasts are too optimistic. UA's revenue growth is still decelerating as its core growth engines sputter out, it faces intense competition from two bigger rivals with deeper pockets and clearer marketing strategies, and the ongoing regulatory probes could exacerbate its current problems.
I don't mind paying a premium for a growth stock with a promising business and irons in the fire. But UA doesn't deserve to trade at a high multiple -- it deserves to go lower until it can grow its core business again.
