So far in 2017, Under Armour Inc (NYSE:UAA, NYSE:UA) has had a rough time on the stock market playing field. Shares are down nearly 30%, even after a recent rally. Management’s spin is that it has experienced “imbalance[s] caused by extreme growth.” That sounds like a cop out, but the company has only likely hit a temporary rough patch in its global growth ambitions.
At the outset of its latest earnings conference call, CEO Kevin Plank detailed that the company he founded thinks well past the next quarter or two, where some more myopic rivals tend to focus their attention.
In his words, “We feel very good about the evolution of our brand strength, relationships with consumers around the world and our ability to gain share in key markets and categories.”
With only about $5 billion in annual sales, Under Armour has more than enough room to grow its global footprint for years to come. By comparison, Nike Inc (NYSE:NKE) reported sales of $32.3 billion last year, and is still growing briskly. Adidas AG (ADR) (OTCMKTS:ADDYY) is the second largest sports apparel rival and logged roughly $23 billion in sales.
Negative Investor Sentiment Is Pulling Down the Industry
All rivals in the athleisure and high-performance athletic gear space are being painted with the same broad brush stroke of negative investor sentiment that is writing off the majority of retail and apparel brands in the face of new online competitors. In the market’s mind, Amazon.com, Inc. (NASDAQ:AMZN) can do no wrong.
The argument is valid, too. Nike just gave in and will start selling its products through Amazon, though it is also trying to combat third-party sellers that dominate Amazon’s vendor list.
Weaker sporting goods retailers have also succumbed to the changing retail climate. Dicks Sporting Goods Inc (NYSE:DKS) is competing well so far against online upstarts, but rivals including the Sports Authority and Sports Chalet recently went bankrupt. As a result, Under Armour saw earnings decline last year. The last time that happened was 2007-2008, the start of the Great Recession across the globe.
The company’s latest quarterly results were a mixed bag. Reported sales jumped a respectable 11% to $1.1 billion. But, operating income was minuscule at $7.5 million and was more than offset by $7.8 million in interest expense and income taxes. The bottom-line result was a loss of $2.3 million, or 1 cent per diluted share.
Operating cash flow was also negative at $33.6 million. Subtracting out $91.8 million in capital expenditures left free cash flow further in negative territory. This is actually nothing new — annual free cash flow has been negative for at least the past decade as Under Armour spends to support its ambitious growth goals.
Sales should continue to hit new highs, but earnings are projected at 42 cents this year and 50 cents for all of 2018. Both fall below the 53 cents reported for all of 2015. If this continues into 2019, loyal shareholders might start losing patience.
To invest in Under Armour, investors need faith that profit growth will return. There appears to be quite a bit of faith, actually, as the P/E based off this year’s projections is rather lofty at 47.9 times. It gets better looking one year out, as forward P/E drops to 38.
Under Armour’s international growth potential remains significant and is a key reason I really like the stock. This business jumped 52%, but accounts for only 20% of total sales. EMEA (Europe Middle East Australia) advanced 55% to only $103 million. The Asia-Pacific region grew an impressive 60%. Latin America was a laggard, by comparison, but grew a very healthy 30%.
Bottom Line for UAA Stock
I worry about Under Armour’s lofty valuation. However, it has what should amount to a long runway for international growth that could last a decade or more. Profitability is also depressed with the excess inventory and subsequent permanent loss of sales from the demise of smaller sporting goods chains.
Rival Nike also sports a somewhat lofty valuation. It currently trades at a forward P/E of 24. Over the past decade, Nike has boosted sales at an 8% annual clip, which falls well short of Under Armour’s 27% annual boost. However, it has held steady with 12% profit growth, which is only slightly below Under Armour’s 16% annual rate.
Nike is also much steadier in terms of cash flow generation. At some point, Under Armour will have to start generating free cash flow. But, its expansion goals remain worthy as it hurries to build out global sales channels. With any luck, it will start generating cash ahead of even almighty Amazon.
As of this writing, Ryan Fuhrmann was long shares of Under Armour.
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