Shares of Under Armour Inc. continued to slip Thursday following investor concerns over future growth and a difference of $215 million in operating income projections.
The shares fell 1.3 percent to close at $31.40 on Thursday, but dipped another 0.3 percent to $31.30 in after-market trading. Investor concerns were raised Tuesday after the company posted third-quarter earnings results.
Shares of Under Armour have fallen 17.2 percent since Monday’s close of $37.90. The company posted third-quarter results on Tuesday morning, which precipitated the declines for the past three days.
John Kernan of Cowen & Co. on Wednesday downgraded shares of Under Armour to “market perform” and lowered the price target to $35 from his previous target of $46 a share. Kernan said, “Under Armour’s margin contraction into 2018 was not part of our thesis….With a more competitive industry and lack of margin expansion until the brand gains more scale, we see consensus estimates that need a multiyear cut…”
Kernan added that “Under Armour’s call to action of ‘Get Big Fast’ is requiring a level of investment that will pressure margins and returns. Retail partners, in a slowing North American market, are managing leaner inventory profiles while product flows are likely to see structural change through next year, pressuring sell-in as the consumer demands faster flows.”
He noted that the company maintained fiscal year 2018 revenues, but substantially reduced its operating income target to $585 million.
Back at the company’s 2015 Investor Day, the company had a stated goal of achieving $7.5 billion in revenues with $800 million of operating income in 2018. The company said it is still on track to achieve 2018 revenues of $7.5 billion. But Chip Molloy, chief financial officer, said during the conference call to Wall Street on Tuesday: “While we continue to significantly outpace the apparel industry, the growth rate going forward will be less than expected from our Investor Day in 2015.”
Under Armour chairman and chief executive officer Kevin Plank, who was a participant at the WWD CEO Summit on Wednesday, defended the company, stating: “Look, life’s not fair. We’ve been in the deep end of the pool for a long time. We’ve been a public company for 11 years and yesterday we reported our 26th consecutive quarter of 20-plus percentage top-line growth. We’re only one of two companies in the S&P 500 that can make that claim and the others are tech and pharma, so doing that in the consumer space is pretty rare air and something we’re really proud of.
“One thing about being public for 11 years is we’ve learned a lot of lessons. You have to do what you say you’re going to do. Look, I enjoy being a public company, we gave a current outlook of less than $5 billion in revenue this year and we reaffirmed the fact that by 2018, we’ll grow to a $7.5 billion brand. This doesn’t come cheap. Our industry is very competitive with a lot of really good established players and the ones we compete against are 46 and 62 years old, respectively. This year, Under Armour turned 20 and we’re still building a lot of infrastructure, process, systems and our team. Today, we’re the number-three global brand in the world. Twenty years ago, we got dropped into a snake pit and there were probably 25 or 30 other snakes and here we are, the third-largest in the world,” Plank said.
For the three months ended Sept. 30, net income was up 27.6 percent to $128.2 million, or 29 cents a diluted share, from $100.5 million, or 23 cents, a year ago. Net revenues rose 22.2 percent to $1.47 billion from $1.20 billion. Under Armour bested Wall Street’s consensus estimate of 25 cents on revenues of $1.45 billion.
Kelly Chen of Telsey Advisory Group on Wednesday also downgraded shares of the stock to “market perform.” Chen added that the “prolonged period of stepped-up investment [and] lack of margin expansion significantly changes the earnings profile here…”
Barclays analyst Matthew McClintock maintained his “overweight” rating on shares of Under Armour. He said: “We believe that Under Armour is taking appropriate steps to invest in the longer-term growth and sustainability of its business….we point to best-in-breed top-line growth, particularly in a challenged retail environment, as evidence of the company’s strong track record of driving a return on past investments.” McClintock said near-term weakness could be a buying opportunity as “we believe it sets the story up well for 2017 and beyond.”