Under Armor (WKN: A0HL4V ) was once celebrated by bullish analysts as "next Nike". Thereafter, however, the company faded and the stock lost half of its value in the last five years. Let's see how it came about and whether the next five years will be better or not.
Under Armor has made several big mistakes in the last five years. First, founder and CEO Kevin Plank was obsessed with UA being a technology company rather than a shoe and apparel manufacturer.
Hard Five Years
Plank said the UA's products are made of futuristic-looking materials like "charged foam." "And made money in wearables and fitness apps. However, the attached business quickly turned into a flop, and in 201
UA also failed to respond to consumer criticism of their designs, notably Curry, the most important footwear model. UA hired a new chief designer earlier this year to move forward, but it's not clear whether the company will be able to attract customers again.
UA remained too dependent on the North American market, which still accounted for 69% of revenue last quarter accounted for. As a result, the bankruptcy of Sports Authority in 2016 had a particularly bad impact. And the aggressive North America plans of Nike and Adidas (WKN: A1EWWW ) also do not help. UA attempted to diversify the business away from footwear, and therefore expanded the apparel business, but here too the fierce competition of Lululemon Nike, Adidas, and other manufacturers was felt.
In 2016, Plank claimed Under Armor would nearly double its annual revenue to $ 7.5 billion by 2018. The actual figure was only $ 5.2 billion, up just 4% from 2017. Then Plank also publicly behind US President Trump, which many aversion. All these wrong decisions led to the growth of sales and operating profit reaching the low point:
|Growth compared to the previous year. Previous year||2014||2015||2016||2017||2018|
|Operating Income||34%||15%||3%||(93%)||not determined (loss)|
Improving the Next Five Years?
Under Armor aims to enhance its North American business, expand its presence in other markets, increase its direct-to-consumer (DTC) revenue, and grow its apparel business while cutting costs and improving margins.  However, UA's second quarter earnings showed that none of these initiatives worked. Sales in North America declined annually for the fourth consecutive quarter, international sales growth did not accelerate, DTC sales grew by only 2% and Apparel sales decreased by 1%.
During the conference call, Plank said the turnaround at UA it would be like "changing a tire while driving". This comparison did not inspire much confidence as a rider who changes tires while driving is likely to cause only one accident.
Nike and Adidas pose a major threat to Under Armor. Both competitors have been working on turnaround plans for many years to expand their DTC channels and their presence in faster-growing markets. Both competitors also have larger R & D and marketing budgets and a more impressive list of celebrities to work with. Both Nike and Adidas are growing stronger than UA, and this gap could increase as long as UA does not budge.
In the US, teens can not do much with Under Armor products. Piper Jaffray's latest "Talking Stock with Teens" survey revealed that Nike, Vans and Adidas were the top three teenage footwear brands – UA did not even reach the top 5.
Analysts currently expect UA revenues only 3% this year and 5% next year. However, earnings are expected to increase by an average of 36% annually over the next five years as the company focuses on cost reductions.
Based on this forecast, UA has a PEG of 1 for the next 5 years, 8th. A PEG ratio below 1 is considered undervalued, so the UA's stock is not really cheap compared to its growth potential. This is also reflected in UA's Forward P / E of 42, which is much higher than Nikes Forward P / E of 24 and Adidas' Forward P / E of 25.
Where will Under Armor be in five years? ?
I think Under Armor will continue to be an important shoe and apparel brand in five years' time. However, the times of growth are over, yet the stock is still traded as a growth value. UA will continue to grow at a low single-digit rate, but will face difficulties in offsetting its expansion in other markets and lower-margin B2C business with its cost-cutting plans. Therefore, I believe that the long-term forecasts for double-digit earnings growth over the next five years may be over-optimistic.
Under Armor has been lagging behind Nike, Adidas and the S & P 500 over the last five years and I believe this trend will continue in the next five years. Investors interested in the footwear market should stick to Nike and Adidas.
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The Motley Fool owns and recommends stocks of Lululemon Athletica, Nike and Under Armor. Leo Sun does not own any of the listed shares. This article was published on 11.8.2019 on Fool.com and has been translated for our German readers.
Motley Fool Germany 2019