What happened
Week to date, shares of Under Armour (UA 0.95%) (UAA 0.92%) were down 13.6% through Thursday's close, according to data provided by S&P Global Market Intelligence. The slide in the stock follows a better-than-expected earnings report, in which the company beat earnings and revenue estimates in the holiday quarter.
However, investors were spooked by a sharp increase in inventory that could weigh on gross margin in the coming quarters. There was probably also some profit-taking by market traders after the stock's sharp appreciation in the second half of 2022.
Under Armour shares are up 15% over the last six months, outperforming the S&P 500 index.
So what
The good news is that revenue accelerated to 7% year-over-year growth in fiscal Q3, excluding currency changes, up from 5% in the previous quarter. That looks strong given lower retail sales across the industry in November and December, according to early estimates by the U.S. Census Bureau.
The bad news is that inventory is increasing faster than revenue. This can be a red flag indicating low demand. However, management said that this reflects a buildup from low inventory levels in the previous year.
UA Gross Profit Margin data by YCharts
Now what
Retailers across the board are relying on discounts and promotional sales to clear out excess inventory as demand softens. This is making the marketplace hyper-competitive right now, and that's reflected in Under Armour's gross margin performance.
From a long-term perspective, management is confident it will get inventory in line with demand soon enough to stay on schedule with its growth plans. It's a good sign that the company has accelerated its share repurchases. The stock is trading at a very low valuation based on its price-to-sales ratio. Under Armour could be a great investment from these levels.
Still, investors will want to monitor the company's inventory levels, which could come back to bite Under Armour's bottom line if consumer spending remains weaker than expected this year.
