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Here’s Why Shares of Under Armour Are Plummeting Today

Jan 31, 2017

Under Armour's shares plummeted more than 25% in pre-market trading on Tuesday after the sportswear company reported disappointing holiday sales and issued an underwhelming sales target for 2017. The company's chief financial officer, Chip Molloy, is also stepping down next month due to "personal reasons."

Chief Executive Kevin Plank listed a number of woes that hurt Under Armour (uaa) during the key holiday season. He said that recent sports apparel brick-and-mortar retail bankruptcies hurt the company's ability to get stock onto shelves. The brand is more affected than rivals like Nike (nke) and German-based Adidas because 85% of revenue still comes from the North America market. Plank also said there was slower retail traffic, more promotions at an earlier point in the holiday season and deeper discounting than in years past.

"I want to be clear, our growth story is intact," Plank said in a presentation to analysts. "What you won't hear from us today are excuses."

Investors, however, sent shares sharply lower mainly because Under Armour projected 2017 revenue to grow between 11% to 12% to reach nearly $5.4 billion. Wall Street analysts had expected $6.05 billion—a figure that implies another year of 20%+ growth, which Under Armour had consistently been posting as it recorded lightning-fast growth that has outpaced the sports apparel market. Fourth-quarter figures—revenue of $1.3 billion and per-share profit of 23 cents—also missed expectations.

The bankruptcies of Sports Authority, City Sports and other sports retailers in recent months has stung Under Armour, which like other sports brands, relies on a wholesale business model to get greater retail shelf space. Because of the softness of brick-and-mortar retail, some rivals—notably Nike and Adidas—have touted their efforts to invest in their own retail presence to essentially take control of their own destiny. The softness in traffic at department stores, specialty stores and big-box retailers have led other apparel makers, most notably luxury brands, to also rethink their wholesale strategy.

Retail data from research firm NPD Group showed that Under Armour's footwear sales tumbled by about 20% in the U.S. market for the fourth quarter, while apparel sales slid 17%.

Plank also outlined a disparity on the balance sheet that likely vexed observers. He said while 2017 revenue would increase by about $600 million from last year, operating income would decline by $100 million to about $320 million. That's because Under Armour wants to continue to invest in the brand and not back away from strategic investments it has made in faster growing businesses. Some of those investments have been costly, most notably a recent 10-year uniform partnership with Major League Baseball and the hundreds of millions it has spent on digitally focused "connected fitness."

Some of the questions Plank fielded were related to the investments he has made to build the brand to make it more fashionable and feel premium to consumers. Some of those investments aren't fueling big sales growth—like the investments in digital apps, connected footwear, and trendy higher end athleisure clothing. A few analysts asked if Under Armour should streamline to focus on fewer, core strategies.

But Plank explained that some of the sales softness was actually from basics, because competition is so great for sports apparel as so many other brands—including startups—target the athleisure craze. "Retail is being disrupted," Plank said. "The consumer expects more today. In order to be a lifestyle brand, you need to be grounded in something. Under Armour is grounded in performance." He went on to tout the efforts his team has made to protect that brand—which he thinks can double to become a $10 billion business.

Molloy explained that the fourth-quarter sales softness was due to weaker-than-expected sales for apparel, which is Under Armour's largest business. Apparel sales grew just 7.4%, while footwear sales jumped 36% in the last quarter of the year. Connected fitness—touted as a future growth driver—saw sales slowing sharply. Fourth quarter sales growth for that business was 7.6% vs. 51% for the entire year.

Under Armour continues to power forward abroad, with international sales increasing 63% for 2016 while in North America, the sales growth was 16%. That increase easily outpaces the broader apparel industry and also athletic apparel, but again, it implies a slower pace of sales growth than what Wall Street had been used to. North America sales growth typically was well north of 20%.

Meanwhile, Molloy's decision to leave the company is a bit of surprise. He only served in that role for a little over a year—he joined Under Armour early in 2016 after stints as a CFO at retailer PetSmart and also an advisor for private-equity firm Roark Capital Group. Effective Feb. 3, senior vice president of corporate finance David Bergman will take on the CFO role on an acting basis.

Shortly after the results, SIG Susquehanna analyst Sam Poser downgraded his rating on Under Armour's stock and cut his price target from $40 to $24, saying "disappointing results, extremely weak guidance, elevated inventory, and resignation of the CFO drive the downgrade." Poser added that while management may be doing what's right for the brand in the long term, 2017 outlook is "too low for us to continue to recommend the stock."

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