Under Armour warned investors that sales growth would slow over the next two years, and the news sent shares down sharply on Tuesday.
The Baltimore-based athletic gear maker said that while it still expects to hit $7.5 billion in revenue by 2018, sales growth over the next two years would be within the range of the “low 20s” on a percentage basis. Over the past three years, Under Armour (UA) reported annual sales growth of 28% in 2015, 32% in 2014, and 27% in 2013. The projected sales increases for 2017 and 2018 would thus imply a deceleration in growth.
“While we expect to continue to significantly outpace the apparel industry, the growth rate going forward will be less than expected from our investor day in 2015,” said Under Armour Chief Financial Officer Chip Molloy.
Investors signaled their concerns. Under Armour’s shares slipped about 13% on Tuesday. The stock has tumbled 34% from the 52-week high on worries about a slowdown in growth.
Founded just 20 years ago, Under Armour has built itself up to become a significant rival to Nike (NKE) and Adidas in North America, at first by building a sizable men’s apparel business. It then found more success in the footwear space, propelled by a savvy deal with NBA star Stephen Curry, and also by paying more attention to the women’s market. Footwear grew from a $239 million business in 2012 to approaching $1 billion in revenue this year. Impressively, the quarterly sales increase Under Armour reported on Tuesday—a 22% jump in sales to $1.47 billion—was the 26th consecutive quarter of revenue growth above 20%.
But Under Armour, with $3.5 billion in North American sales, is still far tinier than its core rivals. Nike @Nike(NKE)and Adidas (ADDYY) generate $18 billion in revenue in that market, Chief Executive Kevin Plank said. He isn’t discouraged by their behemoth positions. “We have tremendous runway in our home market,” Plank said. “We think we have opportunities to gain market share.”
Plank found himself playing a bit of defense on his conference call with analysts on Tuesday. The recent bankruptcies of some major sportswear retailers, including Sports Authority and City Sports, accounted for a loss of $4 billion in revenue for the industry in North America. That hurt distribution for Under Armour, though Plank contends the brand is still a powerhouse.
“We want to be clear, our demand is still there,” Plank said. “The demand for the Under Armour brand hasn’t disappeared, but it hasn’t reappeared dollar-for-dollar in our distribution.” Going forward, Under Armour plans to respond by focusing more on direct-to-consumer retail—a strategy Nike is also pursuing—and finding other places to sell its apparel and footwear, like Kohl’s (KSS).
Part of why Under Armour is finding itself squeezed in North America is that Adidas is recapturing lost market share. Nike, meanwhile, had a successful summer thanks to the Rio Olympics and continues to perform very well as the industry’s market leader.
While Plank continued to boast of the opportunity to gain market share in the North American apparel market, he touted international expansion and a greater focus on footwear as two arenas that would be most compelling for Under Armour going forward. He says that the footwear business could be as big, if not bigger, than where apparel stands today. Footwear is in fact growing faster: sales increased 54% to $785 million for the first nine months of 2016 from a year ago, while apparel revenue jumped 19% to $2.3 billion over the same period.
As Under Armour gets bigger, it makes it tougher for the company to boost sales at a pace that investors were used to. But there’s one advantage that investors seem to be ignoring. The bigger business means Under Armour can compete for key contracts with sports leagues, individual athletes, and universities. Those deals are important for a brand to become more top of mind with shoppers. A recent example? Reports earlier this month that Under Armour will become the official apparel provider for Major League Baseball.