Under Armour Inc. Is Running out of Room to Grow... What's Next?

It's been a tough year for Under Armour (NYSE: UA) (NYSE: UAA) investors. The sportswear and footwear maker was once a Wall Street darling, but slowing sales growth, contracting margins, and questionable management decisionscaused the stock to drop to a three-year low.

However, some investors might be wondering if that steep drop makes Under Armour a contrarian play. Let's take a closer look at three catalysts which might help UA break out of its rut in the near future.

UA's Curry 3 shoes. Images source: Under Armour.

Selling pricier shoes

Between 2015 and 2016, Under Armour's gross margin fell from 48.1% to 46.5%. That decline was attributed to its higher dependence onlower-margin footwear, excess inventory from the Sports Authority bankruptcy, and tough currency headwinds.

The footwear market is still dominated by Nike (NYSE: NKE) and Adidas (NASDAQOTH: ADDYY), so UA might need to lower its prices to remain competitive. To make matters worse, the Trump Administration's proposed border tax could crush UA's margins, since it produces most of its products overseas but generates most of its revenue in North America.

Despite those headwinds, Under Armour intends to keep prices high to protect its brand and margins. During last quarter's conference call, CEO Kevin Plank declared that UA would remain "a premium, full-price brand," and that it intended to justify future price hikes by "amplifying our agenda for newness and innovation at every price point." But that could be easier said than done -- UA's inventories were up 17% at the end of the year, so it must carefully balance promotions with new product launches to clear out those inventories.

International growth

Under Armour's international revenue rose 63% last year, but it only accounted for 15% of its top line. But that growth was far more impressive than its North American revenue, which grew 16% and accounted for 83% of its sales. Expanding internationally would not only offset UA's slower North American growth, but could also counter any border taxes -- since that cash can be reinvested into overseas operations without being repatriated.

During the conference call, Plank noted that "the continued momentum we saw in the fourth quarter across all of our international regions -- especially in the Asia-Pacific region -- gives us increasing confidence in the investments we have made and the strategy we have executed against to scale our brand around the globe."

However, investors should note that Nike and Adidas are already deeply entrenched in many overseas markets. Moreover, Adidas' five-year turnaround plan, which it initiated in 2015, called for aggressive expansions into key urban markets worldwide, higher e-commerce investments, and stronger engagement campaigns -- all of which could represent major hurdles to UA's plans for overseas growth.

Expanding its digital ecosystem

Under Armour acquired and created several fitness apps over the past few years, including MapMyFitness, MyFitnessPal, Endomondo, and UA Record. It also launched connected devices like heart rate monitors, smart shoes, the UA Band, and the UA Scale. It introducedits first mobile shopping app, UA Shop, last year.

UA's HealthBox Connected Fitness bundle. Image source: Under Armour.

Last quarter, Under Armour reported that its "Connected Fitness" ecosystem reached nearly 200 million users who used its free or premium apps. For the full year, UA's Connected Fitness revenue rose 51% to $80.5 million -- but that only accounted for less than 2% of its top line.

That isn't an impressive figure, but Plank stated that its Connected Fitness investments strengthen its core businesses by helping the company "sell more shirts and shoes." That's because those linked apps can make personalized shopping recommendations via UA Shop based on a user's workout history, purchase history, and other personal data.

Therefore, the more that ecosystem grows, the more data it collects for refining product launches. But UA isn't the only footwear maker making big moves in the digital space -- Nike's newNike+ app gives training tips, connects users to each other, and lets them book one-on-one retail appointments at Nike stores.

The key takeaway

I still believe that Under Armour is a risky investment today, due to its slowing sales, declining margins, rising competition, and high valuations. Nonetheless, it's worth noting that UA's plans for premiumization, overseas growth, and the expansion of its digital ecosystem could strengthen its margins and diversify its top line. If UA pulls that off, it could eventually evolve into a more reliable long-term investment like Nike or Adidas.

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Leo Sun has no position in any stocks mentioned. 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.