Under Armour Earnings: The Gift of Low Expectations

Under Armour (NYSE: UA) (NYSE: UAA) shares rocketed higher after the company's earnings report yesterday, as the company edged past revenue expectations and matched estimates on the bottom line.

However, the 16% jump in Under Armour shares seemed to owe more to low expectations, rather than a strong performance by the sportswear company. In fact, Under Armour's quarter continued a pattern of slow revenue growth and weak, if any, profits, which has plagued the company in recent quarters. During a quarter when retail sales tend to spike, the results were especially disappointing. Here are some of the key numbers from the period:

  • Revenue increased 5% to $1.37 billion as North American sales fell 4% and international revenue jumped 47%. Wholesale revenue was down 1%, while direct-to-consumer revenue increased 11%.
  • Gross margin fell 150 basis points to 43.2% because of lower prices and inventory management initiatives, and SG&A costs jumped 1,110 basis points to 43.3% because of changes in timing with marketing spend and investments in direct-to-consumer, international, and footwear businesses.
  • As a result, adjusted earnings per share were just breakeven, down from $0.23 per share a year ago.

It gets worse

Investors hoping a turnaround was on the horizon are going to have to wait longer. Under Armour said for 2018 it expects revenue growth of just low single digits as it sees North American sales continuing to decline, but it also expects international revenue to increase at least 25%.

In the forecast, it's clear that Under Armour hasn't yet found a way to overcome headwinds like the unraveling of traditional retail channels, the resurgence of vintage styles that have helped push Adidas' North American comeback, and its PR gaffes last year. Under Armour seems to be mindful of misstatements on politics last year, as CEO Kevin Plank and his lieutenants said several times on the call that Under Armour wants to be a "quiet company and a loud brand in 2018," with the emphasis being on the products rather than the executives.

Under Armour isn't unique in its struggles at home. Rival Nike (NYSE: NKE) has also seen North American sales decline, but the Swoosh generates a much larger percentage of its sales from abroad than Under Armour. And while Under Armour's growth in direct-to-consumer has been promising, the company is likely to continue to lose sales as partners like Dick's Sporting Goods (NYSE: DKS), its biggest customer, roll out their own private-label apparel lines. Its decision to sell in Kohl's may also be devaluing the brand.

On the bottom line, management expects adjusted earnings per share of just $0.14-$0.19 for 2018, down from $0.19 last year. Under Armour seems to have overcommitted with sponsorship deals and other marketing strategies as it expect sales to ramp up, but with revenue growth stagnating, profits will continue to disappoint.

The numbers don't add up

With that forecast, the stock is now valued at a P/E of about 100 based on this year's expected earnings. In other words, the market still believes in a full-scale comeback from the sportswear company, but there's little evidence at this point that Under Armour can get there. The sportswear maker is in the midst of restructuring efforts as it seeks to right-size the company for slower growth, but it will need to find a way to turn around its North American performance to justify its current valuation. Mantras like "be a quiet company and a loud brand" may be nice, but they're no substitute for strategy.

On the recent earnings call, Plank touted the success of running shoes like the UA Hovr Phantom and Sonic, and he's hopeful that the connected Hovr platform will resonate with customers.

Under Armour could certainly use a buzzy product or ad campaign to help it bounce back in its home market. Without it, there's little justification for the stock to keep rising. This week's jump was based solely on low expectations. At this point, the market has little reason to get its hopes up.

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Jeremy Bowman owns shares of Nike and Under Armour (C Shares). The Motley Fool owns shares of and recommends Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.