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Under Armour falls after weak outlook dampens investor sentiment

The writing on the wall was clear when sports apparel maker Under Armour (UA) predicted a few months ago that the ongoing organizational restructuring will add to the weakness of its US operations. The program, which includes workforce reduction, is being implemented to streamline the business and prepare the company to face the operational challenges.

However, the management seems to have failed to convince the market about its growth strategy. Reflecting the growing pessimism among investors, the company’s stock plunged about 10% Wednesday when its investor day presentation hinted at low single-digit revenue growth in North America in the next five years.

The North American market remains a challenge for sportswear manufacturers and footwear companies in general, due to people’s changing shopping habits and stiff competition. Under Armour was particularly hurt by the lackluster response to the launch of some of its premium brands.

An investor day presentation hinted at low single-digit revenue growth in North America in the next five years

The squeeze on margin due to high publicity costs and heavy discounts continues to weigh on the US operation. In contrast, the overseas business is thriving helped by the general uptick in the global economy. The situation warrants a strategic shift in Under Armour’s existing business model, with more focus on the online platform that allows direct-to-customer sales.

The management can also go for a rebranding so that the company can stand out in the crowded sportswear sector, with the support of promotional activities designed to make the products more visible. The recent efforts to clear additional inventory and discontinue low-demand products were a right step in that direction.

Under Armour Q3 results top estimates on overseas sales; stock soars

On the successful completion on the overhaul next year, as estimated by the company, US sales might return to the positive territory. The rebound, combined with a further growth in international operations, would brighten the outlook. The consensus rating by analysts covering the company’s stock is hold, with more researchers recommending buy after Wednesday’s selloff. Considering the multiple factors that weigh on the outlook, it will be worth waiting for further cues before investing.

Under Armour shares are still trading above their year-to-date moving average, after gaining about 28% since January. Over the past twelve months, the stock rose about 38%.

 

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