What: Shares of Under Armour (NYSE:UAA) fell as much as 10% Monday afternoon after Morgan Stanley analyst Jay Sole downgraded his the stock.
So what: Specifically, sole changed his rating on Under Armour shares from equal-weight to underweight, and reduced his per-share price target from $103 to $62 -- a roughly 10% discount to Under Armour's price as of this writing.
To justify his bearishness, Sole cited data from retail channel reporter SportScan that suggests Under Armour is "losing market share for the first time in 3 years in apparel and, more surprisingly, ASPs are falling at an accelerating pace."
Both trends are more pronounced in women's apparel, despite major marketing investment in this division last year. Though warm weather surely explains some of this, we think UA may be reaching maturity in US apparel faster than previously thought. Though we remain constructive on UA's int'l opportunity, we don't think the shares are priced for a US slowdown.
In addition, Sole noted Under Armour's running footwear prices are down 20% since January, compared to 4% for the industry overall, calling the "change in trend" a "major concern" that could erode Under Armour's premium brand image.
Now what: It's hard to argue Under Armour stock isn't expensive by any traditional metric, especially with shares trading around 70 times trailing-12-month earnings and nearly 51 times next year's estimates even after today's pullback.
At the same time, however, I'm not convinced Sole's observations are entirely on-base. For one, Under Armour already warned in last quarter's report that gross margin would suffer during the holiday season, primarily it works to aggressively clear excess inventory from its fast-growing footwear business and start the year with a clean slate.
That said, losing market share in women's would be concerning on the surface, especially as Under Armour maintains a goal of making its women's business larger than men's over the long term. But also during last quarter's call, Under Armour CEO Kevin Plank pointed out their effort to do so is still in its very early stages.
In fact, Plank single out Women's as an area where "frankly, we now need to be more aggressive," as much of its growth there so far was accomplished with relatively minimal effort and resources. As recently as a year ago, for example, Plank stated the company had "just a handful of people" who were effectively working on women's footwear "as a part-time job," while larger competitors like Nike (NYSE:NKE) have hundreds of full-time employees tackling the same task.
At this stage, then, I think it's premature to say these developments are part of a longer trend. And unless Under Armour demonstrates otherwise, I think investors who take advantage of this pullback stand to be rewarded over the long term.