Why Have We Downgraded Our Price Estimate For Under Armour By 10%?

Under Armour‘s (NYSE:UA) stock price has fallen by approximately 20% since concerns arose late last month over the sales of its the recently released Curry 3.0, the third iteration of its Stephen Curry shoe.  Roughly a month later has come the Q3 2016 earnings release reporting a solid quarter. The company’s sales grew 22% to $1.47 billion in the third quarter on the back of strong footwear sales and exposure to mega events like the Rio Summer Olympics and the New York Fashion Week. However, management announced a gloomy outlook for the future that spooked investors into a mega selling frenzy.

The company expects its revenue growth rate to slow down to the low 20% range in 2017 and 2018, driven by a slowing apparel market in North America. This would mark the slowest growth pace since 2009. Since almost 85% of Under Armour’s revenue comes from the North American market, this is a point of immediate concern. In its 2015 investor conference, CEO Kevin Plank had set targets of $7.5 billion in revenues and $800 million in profits by 2018. Despite being on track to achieve the revenue target, it seems that Under Armour is going to fall short of the profit target significantly.

Plank continues to vie for long-term opportunity, opposing short-term gains at the expense of continued growth. From the prepared statements in the earnings call, it is evident that the management is not willing to make any short-term moves, like cutting marketing or R&D spend, in an attempt to reach short-term profit goals. In actuality, such a strategy could greatly impact the company’s long-term prospects, particularly when it comes to growing its international business and footwear categories. These are areas where the company has invested heavily in order to gain market share and scale. Jeopardising growth in these businesses could have severely detrimental effects on the overall business and the company’s position in comparison to competition.

Furthermore, Under Armour’s stock price has always been highly valued, with its PE ratio coming in at the higher end of the entire apparel industry spectrum. A price correction in this respect was expected sooner or later. For further analysis on this, please refer to our article “Is the Under Amour Stock Price Driven By Current Earnings or Sentiment?“

1. Apparel revenues are going to be directly impacted by a slowdown in the apparel market in the U.S.
2. As mentioned previously, the company is going to invest heavily to continue its expansion plans going forward.
3. Again, due to the increased expansion plans, we expect the company’s SG&A expenditures to increase in the coming few years.

Notes:

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research