Under Armour Inc (NYSE:UA) stock has rewarded investors nicely over the last few years. If you put money in UA stock five years ago and looked at your bank account today, you would see that your investment has more than quadrupled. But UA stock fell 5.1% on Monday to $41.34 on news that investors might want to take note of. That was the largest daily drop for UA stock in about two months.
Morgan Stanley analyst Jay Sole issued a report that says he is worried about weakening demand for Under Armour’s women’s apparel, along with soft trends in the running shoe market. He added that both of these factors will likely lead to a quarterly sales miss. (Source: “Under Armour’s Problems Are Far More Serious Than Spieth: Morgan Stanley Is Worried About What New SportScan Data Shows,” Benzinga, April 11, 2016.)
Sole added that after seeing triple-digit growth, sales of running shoes are starting to decelerate, largely due to price declines. Sole said that the average selling price for Under Armour running shoes has dropped by 24% since 2013, while it has only fallen four percent for the entire industry. (Source: “Under Armour stock sinks after Spieth loss, Morgan Stanley downbeat outlook,” MarketWatch, April 11, 2016.)
“Under Armour has always competed on brand image and innovation, rarely on price,” Sole said. “Footwear sales are growing strongly, but average selling prices are falling. This change in trend is a concern because it suggests a fundamental shift in the Under Armour story.” (Source: Ibid.)
What’s especially concerning is that Sole cites data from SportScan, which shows that first-quarter wholesale apparel sales fell two percent from the previous year. Wholesale sales in the previous quarter, the fiscal fourth quarter of 2015, also fell by two percent. (Source: Benzinga, op cit.)
“Many assumed the soft 4Q data was due to warm weather. The fact it has persisted when weather was more normal is a troubling sign,” Sole said. (Source: Ibid.)
One last concern: one of Under Armour’s biggest growth opportunities looks like it’s starting to lose steam. According to SportScan, Under Armour’s women’s apparel sales fell seven percent in the first quarter, coming off a decline of six percent in the previous quarter. (Source: “Morgan Stanley signaled a huge red flag for Under Armour,” Business Insider, April 11, 2016.)
“UA’s ‘young, hungry and fearless’ brand image may not be resonating with females and at the same time, the competitive landscape in that space has become intensely crowded,” Sole said. (Source: Ibid.)
The meek women’s sales data comes after the company pledged to grow the women’s business. On a conference call a few months ago, CEO Kevin Plank told analysts that he plans on growing the women’s business to be as large as—if not larger than—the men’s segment. (Source: “Under Armour is using Gisele for an aggressive expansion plan — and it should terrify Lululemon,” Business Insider, January 28, 2016.)
Under Armour has been heavily investing in propping up its women’s business. They recently spent about $15.0 million on the “female empowerment campaign,” signing endorsement deals with female athletes and supermodels, such as acclaimed ballerina Misty Copeland, Olympic skier Lindsey Vonn, U.S. soccer team member Kelley O’Hara, and Victoria’s Secret supermodel Gisele Bundchen.
According to Forbes, the women’s line accounted for about 30% of total revenue, up from 20% in 20015. (Source: “Is Under Armour Losing Favor With Women?” Forbes, January 11, 2016.)
Despite the downbeat outlook, Sole said that sales in the current quarter will most likely still be “solid.” (Source: MarketWatch, op cit.)
The Bottom Line on UA Stock
Sales may be showing signs of weakness, but this doesn’t mean the end for UA stock. The company said it expects revenue growth of about 25% and operating income growth of 23% for the current quarter.
Under Armour has a lot going for it, too, such as its “Connected Fitness” business segment, growing brand name, and expansion into China.