NYSE:UAA UNDER ARMOUR, INC
Sector financial performance:
This company, who primarily develops, designs, markets, manufactures, and distributes sportswear, performance apparel, footwear, and accessories mainly by wholesales and as well by their own stores or ecommerce site, has been grouped into sportswear sector in clothing industry.
As our data indicated there is a clearly downward trend, since 2016, in the wholesale performance among companies in this sector primarily due to the continuing and probably increasing sales pressure of their retail customers, which, as we discussed before, may be a result of slowing down traffic of stores or deflation pressure due to changes in monetary policies. Therefore, while, due to different customers’ base and brands’ awareness that products of different companies have, the sales of companies in this sector reacted differently to elastic of price in terms of extent and timing, they are all going or have gone through a similar process: increasing promotion/markdowns to boost sales as wholesales order go down, reducing promotion/markdown as margin go down to the bottom, and sales going down further.
In addition, while decrease in wholesales resulted from decrease in sales of their customers’ stores those companies’ own stores have experienced increase in sales.
While we see that sales of sportswear retailers in US market are probably re-bouncing driven by strong growth in online sales and increasing ability to raise price/less discounting as a result of increasing traffic since the last quarter of 2017, the positive changes among retailers may not yet be transferred to wholesalers and manufacturers along value chain of sportswear. The increasing wholesale sales (4% of 2018 compared with 2% of 2017) in this sector may be only a result of rising price and increasing marketing spending.
As it has been seen from all companies in this sector, lowering price may slow down the process of sales shrinking at the beginning but it seems no company has been successful in effort to defending their sales only by promotion or markdowns due to the increasingly strong downward trend in traffic. As margin kept going down as a result of decrease in price some companies who are less profitable (with an operating margin of 2.5%) have no more space for further lowering price so that the only thing that they can do is only to look at the continuing decrease of sales and wait for the moment that their retail customers’ traffic hit the bottom. For those companies whose margins are still in safe zone, their profits have decreased significantly and will also have to face decreasing sales as their margin spaces for further lowering price narrow down to something unacceptable ( for example, with an operating margin of 3.5%).
According our analysis, companies’ enterprise price/EBI ratios vary in a large range between 20 and 120 with interest/EBI ratio of about 32%.
Data indicated that the sales of this company has increased fast due to promotion/markdowns between 2014 and 2016 but the increase slowed down (3% growth in 2017) entering fiscal 2017 as this company decreased promotion activities probably under the pressure from decreasing profitability as we can see that the sales of wholesale in US market decreased while its US retail sales still gained increase. It seems that sales is bouncing back (7%) compared with low 2017 in 2018.
The first six months of fiscal 2018 compared with 2017 (20180630)
The net sales of this company increased 6.7% (7.7% for 2Q) primarily attributable to increase in sales units of several categories.
The fiscal 2017 compared with 2016 (20171231)
The net sales of this company increased 3.1% primarily attributable to increase in sales units of several categories.
The net sales of this company increased 7.7% in the first six months of fiscal 2017 compared with the same period of 2016, primarily attributable to increase in apparels sales of several categories (9%).
The net sales of this company increased about 22% in fiscal 2016 compared with 2015, primarily attributable to increase in apparels sales of several categories (15%) and footwear sales (50%).
The net sales of this company increased about 29% in fiscal 2015 compared with 2014, primarily attributable to increase in apparels sales of several categories (22%) and footwear sales (57%).
This company’ gross margins is currently 44.5% (distribution and rental costs excluded) down from 49% of 2014 primarily due to price’s discounting. While sales continued to increase, the SG&A as percentage of sales (up to 42% in 2018) increased significantly due to accelerating spending on marketing and addition of expenses from expansion of retail channels together with unexpected slowing in sale growth. As a result, its operating margin went down to 2.5% in 2018.
This stock currently has an enterprise price/EBI ratio of 105 ($21). We think that its stock is being relatively overvalued considering the uncertainty in correlation between sales growth and marketing spending, which seems to be determining its earning.