Under Armour (UA -1.51%) (UAA -1.83%) and Lululemon Athletica (LULU -0.78%) went in completely opposite directions over the past five years. UA's stock plunged nearly 60% as it struggled to keep pace with Nike (NKE -0.40%) and Adidas (ADDYY -0.50%) in the crowded athletic footwear market. Meanwhile, Lululemon's stock skyrocketed nearly 400% as it continued to expand its high-end athleisure apparel business.
Past performance never guarantees future gains, but analysts still expect Lululemon to grow at a much faster rate than UA for the foreseeable future. However, UA also trades at just 14 times forward earnings, which is significantly lower than Lululemon's forward price-to-earnings ratio of 30.
Could UA actually outperform Lululemon this year by drawing in more value-seeking investors in this tough market for growth stocks? Let's examine both companies and their near-term headwinds to find out.
Image source: Getty Images.
Why did Under Armour stumble and fall?
Under Armour's troubles started long before the pandemic hit. Its newer designs were poorly received, its flagship Curry shoes generated diminishing returns, and it lost ground to Nike and Adidas in North America as both larger rivals expanded their direct-to-consumer channels.
In 2015, UA claimed it could double its annual revenue to $7.5 billion by 2018. But it went on to generate just $5.2 billion in revenue that year.
The following two years were even more challenging. Its revenue rose only 1% in 2019, then plunged 15% to $4.5 billion in 2020 as its first-party and wholesale retailers shut down during the pandemic. It squeezed out a slim profit in 2019 but racked up an adjusted net loss of $120 million in 2020.
To make matters worse, the Securities and Exchange Commission (SEC) launched a probe into the company's accounting practices.
UA's headaches continued throughout 2021. It eventually settled the SEC probe for $9 million last May and admitted that it had inflated its revenue to meet analysts' estimates by pulling forward its orders for six consecutive quarters starting in the third quarter of 2015. It also struggled with supply chain challenges, rising costs, and COVID-19 disruptions in China.
Despite those challenges, UA's revenue still rose 27% to $5.7 billion in 2021 thanks to the expansion of its direct-to-consumer business (40% of its top line); its double-digit sales growth across all of its geographic regions; and robust sales of its athletic apparel, footwear, and accessories. Its gross margin expanded 210 basis points to 50.3% for the full year, and it returned to profitability with an adjusted net income of $397 million.
At the end of 2021, UA announced that it would realign its fiscal year to start on April 1 instead. As a result, it will skip fiscal 2022 entirely and go straight to fiscal 2023. In that fiscal year, it expects its revenue to rise 5% to 7%, for inflationary and foreign exchange headwinds to compress its gross margins, and for adjusted earnings per share (EPS) in the range of flat to 7% higher.
Why did Lululemon keep firing on all cylinders?
In 2018, Lululemon was struggling with slowing sales and the abrupt resignation of CEO Laurent Potdevin. But in 2019, Potdevin's successor Calvin McDonald reset the market's expectations with an ambitious Power of Three plan aimed at generating double-digit annual revenue growth through the end of fiscal 2023 by doubling Lululemon's men's revenue, doubling its digital revenue, and quadrupling its international revenue.
The pandemic initially cast a dark cloud over that plan, but Lululemon actually hit its e-commerce and men's targets ahead of schedule last year, and it expects to achieve its international goal by the end of fiscal 2022.
In fact, Lululemon is so confident in its ability to wrap up its Power of Three plan this year that it launched a new five-year growth plan, dubbed Power of Three x2, this April. This new plan calls for Lululemon to nearly double its annual revenue from $6.3 billion in fiscal 2021 to $12.5 billion in fiscal 2026 by doubling its men's and digital revenue again, as well as quadrupling its international revenue again, relative to fiscal 2021.
Revenue rose 21% in 2019, increased 11% in 2020 even as the pandemic shut down its stores, and jumped 42% to $6.3 billion in 2021 as those headwinds passed.
Its gross margin rose 170 basis points to 57.7% in 2021, and it continued to open new stores even as other brick-and-mortar retailers (including Under Armour) shuttered more stores. Its direct-to-consumer business (including first-party stores and digital sales) generated 44% of its revenue.
Lululemon faces minor competition from smaller brands like Gap's Athleta, but it doesn't face as many direct competitors as UA, which clearly remains the underdog in its market. Analysts expect Lululemon's revenue and earnings to rise 23% and 22%, respectively, this year.
The pricier stock is still the better stock
Under Armour's business is stabilizing, but its high-growth days are likely over. Meanwhile, Lululemon continues to fire on all cylinders and remains one of the fastest-growing companies in the retail apparel sector.
Lululemon's higher valuation might limit its upside in this challenging market, but it's still clearly a better all-around investment than Under Armour.
