4 red flags in Under Armor Inc’s income statement

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Under protection (NYSE: UAA) the stock has fallen nearly 20% in the past 12 months due to slowing sales, increased spending and tougher competition. To understand these challenges, investors should look at UA’s second quarter income statement, which has four flags indicating that its days of strong growth may be over.

Image source: Under Armor.

1. Slower sales growth

Under Armor revenue grew 28% per year in the quarter to $ 1 billion, which simply matches analyst estimates and ends the streak of eight consecutive front line beats. This also represents a slowdown from growth of 30% in the first quarter and 29% in the quarter of the previous year.

The company attributes much of the drop to the bankruptcy of retailer Sports Authority. But the failure of the chain – as well as the fragile reports of Nike (NYSE: NKE), Skechers, and VF Corp – indicate that the demand for sports clothing and shoes is weakening.

Analysts expect Under Armor revenue to increase of 21% in the third quarter, 22% in the fourth quarter and 24% for the year as a whole. This also represents a slowdown compared to growth of 28% in 2015 and 32% in 2014.

Revenue Graph in UA (Quarterly)

Source: YCharts

2. Growing dependence on shoes

A major challenge for Under Armor is its growing reliance on footwear. In the first half of 2016, its footwear revenue grew 61% per year and accounted for 25% of the company’s sales, compared to 20% in the first half of 2015. Clothing sales increased from 20% to 62% of revenue, against 67% of turnover a year earlier.

This means that the company is increasingly exposed to the saturated athletic footwear market, which is dominated by deep-seated players like Nike. In March, Morgan Stanley reported that Under Armor shoes had seen a 23% price drop in less than two years, compared to a mere 4% drop in the industry as a whole. Increased sales of low-margin shoes, outlets and international products notably lowered its gross margin by 70 basis points annually to 47.7% in the last quarter.

To challenge Nike’s high-end LeBron James, Kevin Durant and Jordan shoes, Under Armor signed their own costly deals with Steph Curry, Cam Newton, Tom Brady and other top athletes. But as the company recently discovered with the poor reception of the new Curry 2 across social media, top endorsements can’t make up for drab shoe designs.

Image source: Under Armor.

3. Expenses on the rise

The company’s high-profile deals, along with higher marketing spend and a $ 23 million depreciation charge from the Sports Authority bankruptcy, pushed its selling, general and administrative expenses by 32% through year to reach $ 458 million in the last quarter.

This sharp increase reduced the company’s operating margin from 4.1% in the previous year quarter to just 1.9%, while the net profit margin fell from 1.9% to 0.6 %. Under Armor’s margins vary widely throughout the year, but its second quarter margins represent multi-year lows for the company.

Graph of operating margin in UA (quarterly)

Source: YCharts

4. An unnecessary charge of $ 59 million

The sportswear company’s net profit margin was positive at the end of the second quarter, but it still ended the quarter with a net loss of $ 52.7 million due to a charge of $ 59 million. dollars caused by a class action lawsuit.

Under Armor previously had two classes of shares: class A for common shareholders and class B for CEO Kevin Plank. However, it issued new Class C non-voting shares as a one-for-one “dividend” to Class A and B shareholders earlier this year. The move angered some investors, who took legal action against the company, saying the split diluted existing shares to protect Plank’s control over the company.

To appease those investors and offset the dilution, it paid a one-time special dividend of $ 59 million to Class C shareholders, which was written off as a loss on all three classes of shares. The whole ordeal did not significantly increase shareholder value, since the dividend just offset the dilution, but it did cause a quarterly loss.

Beyond the income statement …

Under Armor’s income statement reveals many potential issues with the company, but the red flags don’t end there. The balance sheet shows that inventories grew 30% per year in the last quarter, cash and cash equivalents fell 20% and long-term debt increased 25%.

Additionally, Under Armor stock still trades at 50 times futures earnings, which is much higher than Nike’s futures P / E of 20. Therefore, investors should carefully consider all of these signals. alarm before buying Under Armor stock.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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