One of the top athletic apparel brands has been a lousy investment over the last 10 years. Shares of Under Armour (UA -2.04%) (UAA -2.04%) are down 28% since April 2012, underperforming the S&P 500 return of 209%. But the stock could be set for much better showing over the next decade.
Under CEO Patrik Frisk, who took over in Jan. 2020 for company founder Kevin Plank, Under Armour has gotten itself in fighting shape. Revenue and margins are rising, and its disciplined approach to managing costs could be rewarded with a higher stock price soon enough.
Under Armour is delivering profitable growth
Frisk is pushing all the right buttons to give investors reasons to invest in this recovering athletic wear brand. In his letter to shareholders in March 2022, he said: "We are intentional in creating and pulling levers that drive our profitability." Management's actions back this up. Less than a year after Frisk took over as CEO, Under Armour sold its MyFitnessPal platform for $345 million to Francisco Partners. The sale of the digital fitness subscription business got Under Armour more focused on delivering growth where it matters.
Image source: Getty Images.
In 2021, growth accelerated to 27% as revenue hit $5.7 billion. Frisk got the brand more focused on serving the customer while also bringing costs down. "Our efforts to pursue a clearly defined target consumer, rebase our cost structure, and fundamentally change the way we work are beginning to yield results," Frisk said in the shareholder letter in March.
Gross margin improved to 50.4% last year, partly driven by strong pricing and the exit of the MyFitnessPal business. Operating margin also rebounded nicely.
Data by YCharts .
During the fourth-quarter earnings call, Frisk noted that inventory levels are the "healthiest they've been in the last decade." This indicates that supply is better aligned with demand, which should continue to contribute to strong margin performance.
Most impressive is that Under Armour is making the right moves to align costs while not sacrificing investments to grow the top line.
Data by YCharts.
Like all retailers right now, Under Armour continues to deal with near-term headwinds, such as ongoing COVID-19 challenges and supply chain issues. There were some pockets of weakness in the fourth quarter, including a double-digit decline in revenue in Latin America. But management characterized these headwinds as a "temporary speed bump on our road to continued profitable growth over the long term."
At a share price of under $15, Under Armour's class A shares trade at a price-to-earnings ratio of 19.7, which is a steep discount to the valuations of comparable apparel stocks like Nike and Lululemon.
Data by YCharts.
Under Armour's competitors admittedly trade at higher valuations because of their superior track records when it comes to growth. However, based on the company's improved operating performance under Frisk, investors would be making a mistake valuing the company based only on its past performance.
Under Armour is looking the part of a growth stock right now, and that means shares could be significantly undervalued compared to where it might trade in the next 10 years.
