Is Under Armour (UAA) Doomed To Have A Terrible 2018 Too?

Under Armour, Inc. (NYSE:UAA) , once considered the arch rival of NIKE, Inc. (NYSE:NKE) , has been in a spot of bother for quite some time. The stock, which was trading around $50 in 2015, is now hovering around $15.

Neither Stephen Curry's "Curry One" signature shoe nor UA SpeedForm Apollo running shoes have helped the stock to drive performances in 2017. Year to date, the stock has witnessed a sharp decline of 47.7%, against the industry’s gain of 8.1%. Under Armour has also been facing issues like sluggish North America business, deteriorating gross margin, higher interest expenses and most importantly decline in the bottom line.

Let’s Have a Closer Introspection?

Decline in sales in North America has been a major concern for investors in the past few quarters. The company has been reporting sluggish sales from the region since fourth-quarter 2016. Bankruptcies, store closures, decrease in productivity and demand along with change in fashion preference have been the major causes behind the dismal show.

Further gross margin, a key financial metric in determining a company’s basic financial health, has persistently declined in the past few quarters. In third-quarter 2017, gross margin contracted 130 basis points to 46.2% following a decline of 190 and 70 basis points in the second and first quarter, respectively. We noted that, in the first, second, third and fourth quarters of 2016, gross margin declined 100, 70, 130 and 320 basis points to 45.9%, 47.7%, 47.5% and 44.8%, respectively. Decline in gross margin has been primarily due to aggressive inventory management, regional mix and higher promotional costs.

Under Armour has been grappling with higher interest expenses stemming from increased debt levels. In third-quarter 2017, the company’s interest expenses increased to nearly $9.6 million in comparison with $8.2 million in the prior-year quarter. Further, it anticipates interest expenses to rise to roughly $35 million in 2017 from $26.4 million in 2016.

All these aforementioned headwinds have been major deterrents to the company’s bottom-line, which has been declining over the past few quarters. In third-quarter 2017, Under Armour’s earnings fell 24.1% year over year. Following the last quarter results, the company trimmed the sales guidance for 2017, giving another blow to the stock. It now expects net revenues for 2017 to rise in low-single digits, down from the earlier estimate of an increase of 9-11% over the 2016 level. This can primarily be attributed to sluggish demand in North America and operational difficulties. The company anticipates adjusted earnings per share in the range of 18-20 cents, compared with the earlier estimate of 37-40 cents.

Stock Surges in December: Here’s Why

However, as the old saying goes “All’s Well That Ends Well”, the company has displayed resilience of late. In fact, the stock has shown some signs of recovery lately, which is a big boost before we kick off 2018. Month to date, the company’s shares have witnessed a sharp gain of 14.2%, outperforming the industry’s growth of 5.3%. The recent surge can primarily be attributed to industry experts’ optimistic view on company’s 2018 performance.

Earlier, management announced a restructuring plan in order to utilize financial resources more efficiently. This will cater to the evolving demands of the changing consumer environment. In sync with this, Under Armour anticipates to incur total estimated pre-tax restructuring and related charges of roughly $110-$130 million in fiscal 2017. The company incurred $89 million of these charges in the third quarter.

The Zacks Rank #3 (Hold) company continues to seek opportunities for increasing global footprint and market share. Though the company generates a major portion of revenues from the North America region, it intends to expand business operations to other parts of the world, in order to mitigate the risks stemming from concentration in one geographic region. In sync with this strategy, the company has opened factory as well as brand stores in Canada and China over the years along with giving franchise licenses in several other countries.

Further, it has rolled out e-commerce platforms in countries like Mexico, Australia, New Zealand and Chile. Another major tool used by Under Armour to broaden base is the development of an International e-commerce team. In third-quarter 2017, international business surged 35% to $305 million, following an increase of 57% in the preceding quarter.

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2 Other Retail Stocks Hogging the Limelight

G-III Apparel Group, Ltd. (NASDAQ:GIII) delivered an average positive earnings surprise of 6.1% in the trailing four quarters. It has a long-term earnings growth rate of 15% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Michael Kors Holdings Limited (NYSE:KORS) delivered an average positive earnings surprise of 23.7% in the trailing four quarters. It has a long-term earnings growth rate of 7.5% and a Zacks Rank #1.

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