This past year was supposed to mark the beginning of Under Armour’s (NYSE: UAA) (NYSE: UA) turnaround. Following surprisingly weak 2016 results, CEO Kevin Plank said in late January that the company was at an “inflection point” that would allow for reduced, but positive, sales growth and just a slight decline in operating earnings in 2017.
Things didn’t work out that way. Below, we’ll take a look at where the sports apparel giant’s business stumbled.
Hits and misses
Under Armour kicked the new fiscal year off in late April by posting a decent 7% sales increase. That result marked another sharp slowdown from the prior quarter’s 12% expansion. It also further removed the business from the 20%-plus growth that shareholders had consistently seen for years leading up to the decline that started in 2016. Still, the growth met management’s targets and came with just a slight profitability decrease as gross margin slipped 70 basis points.
Operating trends worsened significantly from there. In early August, the company revealed that its core U.S. market was flat, which meant it had to rely on its relatively tiny international business for all of its (modest) sales gains. What’s worse, Under Armour was forced to cut prices just to keep revenue roughly steady. Gross profit margin slumped by nearly two full percentage points in the second quarter to 45.8% of sales. As a result, Plank and his team reduced their full-year outlook on both the top and bottom lines.
Those lowered expectations proved to be too optimistic. Under Armour’s third-quarter results, announced in late October, included its first year-over-year revenue decline as a public company, as solid growth in international markets failed to make up for a 12% slump in the U.S. segment. Gross profit margin contracted again by almost two percentage points, and the company had to lower its outlook for the second straight time.
Rivals and outlook
Under Armour can’t take solace in the fact that this was an industry-wide slump, either. While Nike suffered through a similarly weak 2016, the company enjoyed solid, and in some cases improving, operating trends last year. That’s partly because Nike gets more than half of its business from those healthier international markets. But the footwear giant is holding up well in its core geography, too. Sales in the U.S. dipped by just 4% in the final six months of the year, compared to Under Armour’s 12% slump. That success backed up Nike’s claim that it can increase sales in the high single-digit range in 2018 while improving profitability at the same time.
Under Armour shareholders are looking at a bleaker forecast. The company now believes revenue will rise at a low single-digit pace for 2017, compared to the original 11% to 12% target. Operating income, rather than dropping 24% as executives first warned back in January, is now on track to dive by 66% to $145 million.
Under Armour still has major growth opportunities ahead of it, including international expansion and the promising footwear business. Innovative product releases routinely lift sales and profit results, and that’s as true for Under Armour as it is for Nike.
Yet I see two big issues that stand in the way of a quick rebound for this stock. First, Under Armour’s finances are deteriorating to the point that it might become hard to pursue big growth opportunities. Second, and more importantly, investors are questioning management’s grasp on the market following a string of surprisingly weak results that span over a year. Unless Plank and his team return to a pattern of at least meeting their forecasts, I wouldn’t expect this stock to have a much better 2018.