Under Armour did top analysts' top- and bottom-line expectations for the period, but like rival Nike (NKE) before it, investors were less concerned about those numbers and more concerned about the health of the sports apparel sector in general. While Nike's investor concerns revolved around an inventory glut, Under Armour's waning growth seems to be driving the stock lower.
Apparel sales in the quarter rose 18% year over year to $1.02 billion and North American sales rose 15.6% in the period, but that growth is the slowest for the company in North America in six years.
While Growth Seeker co-manager and Cocktail Investing co-author Chris Versace believes the sports apparel market is getting saturated between dominant Nike and a resurgent Adidas, Under Armour is in a good position as the relative newcomer.
"Is North American apparel saturated? The landscape is definitely more competitive," Versace told Real Money in an interview Tuesday. "But whether it is in trouble, it is too soon to tell. The opportunities to steal market share are still the greatest for Under Armour, though." Versace cut Growth Seeker's price target on the company to $40 from $55.
Indeed, CEO Kevin Plank said during the earnings call that Nike and Adidas have about 20,000 distribution points compared to about 11,000 for Under Armour, meaning that as Under Armour scales up its operations, it has a lot of runway.
Under Armour still expects to reach its annual revenue goals of $7.5 billion by 2018 and $10 billion by 2020, but the company does see a threat to its 2018 $800 million operating profit goal as its expectations for growth in its apparel segment becomes more tepid, matching Wall Street's pessimism about the space.
Under Armour has stated that it expects North American growth going forward to be driven by its burgeoning footwear business, led by NBA star Stephen Curry and his line of basketball shoes -- the latest edition of the shoe is set to be released tonight.
"Apparel remains popular," Plank said during the earnings call. "But Under Armour has other opportunities that are outpacing apparel growth."
To that end, Under Armour's footwear segment rose 42% year over year to about $279 million, representing about 19% of the company's overall revenue for the period. Plank and his team emphasized that the company is still relatively new in the footwear space compared to Nike and Adidas. To get to the level of distribution and brand recognition that those companies employ, Under Armour will have to invest heavily in the space, Plank said.
Versace wasn't alone in lowering the company's price target, with Jefferies publishing a note reiterating its Hold rating and lowering the company's price target to $34 from $42.
"UA is a strong brand, but promos are rising suggesting sell-through is slowing as Adidas and denim re-emerge," Jefferies analyst Randal J. Konik wrote. "We remain guarded on UA wehere valuation is still highest among peers. ... We are lowering our PT to $34 to reflect a 24x EV/EBITDA multiple (still high)."
Under Armour remains a growth company, and as it grows the cost of reaching its revenue and operating margin goals will fluctuate, Versace said. Under Armour shares received a reality check from Wall Street Tuesday, but the stock is still worth owning, according to Versace. Today's downturn could make the price of owning a piece of what could be the future of sports apparel right.