Under Armour Inc Shares Drop After Earnings: Here's What You Need to Know

By Markets Fool.com

What happened

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Shares ofUnder Armour Inc(NYSE: UA)(NYSE: UA-C) were down 12.7% ("A" shares) and 13.8% ("C" shares) at 1:10 p.m. EDT on Oct. 25, following the release of the company's third-quarter financial results and earnings call. As of this writing, Under Armour shares are down more than one-third from their all-time high, set in 2015:

UA data by YCharts

So what

Under Armour reported another strong quarter, with revenue up 22% to $1.47 billion, a 16% increase in operating income, and 28% growth in net income versus the year-ago period. But at the same time, fears that the company's growth is slowing -- and that increased competitive pressure will make it harder for the company to grow its profits -- are weighing on its stock even after a relatively strong quarter.

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Sales in North America, which has been Under Armour's main market since its founding, grew 16% as demand for athletic apparel slows in this region at the same time competitors continue to focus on increased marketing here. This was a key reason Under Armour's quarterly sales growth, while strong at 22%, was the slowest rate of growth the company has delivered in six years. On the earnings call, CFO Chip Molloy said that Under Armour expects the company's growth rate, going forward, will be slower than management anticipated only last year.

And while the company reiterated its guidance for full-year revenue growth of 24% to $4.925 billion, and operating income growth of 8%-9%, it backed away from its longer-term profit growth projections from its 2015 investor day. The company is still on track to reach $7.5 billion in sales by 2018, but said it would grow operating income approximately 15% per year, falling far short of the $800 million it had been projecting to reach by 2018.

Now what

Under Armour's focus under founder and CEO Kevin Plank continues to be the long-term opportunity. It's evident after this call that management isn't willing to make short-term moves, such as cutting marketing or R&D spend, simply to reach short-term profit goals. To the contrary, management seems to recognize that taking these steps would likely weaken the company's long-term prospects, particularly in growing its international business and footwear category, areas where the company is investing heavily today in both marketing and product development.

Furthermore, Under Armour is one of the most-shorted stocks in theS&P 500, in no small part because its shares have regularly traded at a very high multiple to earnings metrics, and it's possible that today's announcement may have led to an increase in short interest in its shares, further pushing its share price down.

Profitability is critical to any business, but Under Armour's success as an investment will be the product of how well it can establish itself as a household name around the world. It's evident after this quarter's earnings call that Plank and company are playing the long game, while Mir. Market continues to react to short-term news.

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Jason Hall owns shares of Under Armour (A Shares) and Under Armour (C Shares). The Motley Fool owns shares of and recommends Under Armour (A Shares) and Under Armour (C Shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.