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Are Under Armour's High-Growth Days Over?

- By Harsh Jain

Under Armour (UA)(UAA) took a hard hit in 2016. Moreover, the stock is off to a bad start this year also as it is down nearly 34% year to date. The company's revenue has been declining which is disappointing news for shareholders.

Under Armour reported feeble fourth-quarter results in January. For the fourth quarter, the company reported earnings per share (EPS) of 23 cents, missing the analysts' estimate by 2 cents. On the other hand, the company's revenue came in at $1.31 billion, again missing the consensus by $100 million.

That figure represents a surge of just 12%, down considerably from 30.7% in the fourth quarter of fiscal 2015, which also represents the slowest growth in eight years. On top of that, the company's gross margin also declined to 44.8% from 48% in the year-ago period.

Over the past few quarters, the company's gross margins have been declining mainly due to the escalating competition from its foremost rivals Nike (NKE) and adidas (ADDYY). Moreover, the bankruptcy of the Sports Authority resulted in excess inventory which also negatively impacted the gross margin.

North America accounts for one of the company's most significant markets, but the sales in that region surged just 6% in the prior quarter compared to solid double-digit growth throughout the past few years.

Although the company's sales in North America only grew 6% last quarter, its international revenue escalated over 55%. Despite that amazing growth rate, the revenue generated from international markets accounted for just 15% of the company's overall revenue. This clearly suggests the company still has plenty of room to expand its footprint in the international markets.

Moreover, it looks like Under Armour's investments in international growth have started displaying positive results as its operating income increased 294% in the prior quarter. China plays a significant role as it presents new growth opportunities for Under Armour, but outshining its foremost rivals in China will be a difficult task.

Under Armour's management said it is on the way to more than doubling its sales in China compared to the sales generated in 2015. The company's success in China is mainly driven by Stephen Curry, as his signature shoes are performing well. Apart from basketball, the company believes the running segment will continue to lift its sales in the future.

Summing up

Under Armour displayed poor performance in 2016, but that doesn't mean growth is over for the company. The amount of sales generated from North America still accounts for approximately 85% of the company's overall revenue. Unfortunately, the company's sales growth in North America continues to move downward.

To overcome this issue, the company is aggressively focusing on the international markets that will certainly reap fruitful results in the long run. However, the stock currently trades at a price-earnings (P/E) ratio of 40, which makes its highly overvalued.

As a result, shareholders looking to initiate a position in the stock should wait, and existing stockholders should continue adding in small quantity at every dip as its long-term prospects look strong.

Disclosure: No position in the stocks mentioned in this article.

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This article first appeared on GuruFocus.