Slowing Apparel Market Could Sink Under Armour, Analysts Say
Under Armour (UA) - Get Report has had an impressive run as the company has doubled its market cap in the past four years. But the good times may be coming to an end, according to a Morgan Stanley note Friday that forecast a 23% price target downside for fiscal 2018.
The firm sees the Growth Seeker holding's U.S. wholesale apparel segment, which accounts for 49% of sales, as the biggest risk to the company's earnings-per-share growth expectations. The firm's analysis suggests that the wider market expects the segment to experience 16% growth in fiscal 2017 and 2018. That forecast runs counter to Morgan Stanley's own checks because the athletic apparel industry is already experiencing negative growth so far this year.
"UA is a growth story, but the US athletic apparel environment is slowing and UA ASPs (average selling prices) are falling. US apparel is roughly 2/3rds of UA's sales mix. These issues are particularly acute in women's apparel," analyst Jay Sole wrote. "UA's running footwear strategy is a second concern. Sales are growing solidly, but ASPs are fading. UA competes on brand image and innovation, rarely on price. This trend change is a concern because it suggests a fundamental shift in the UA story."
For those reasons, the firm gave Under Armour an Underweight rating and $31 price target, representing a potential 23% downside from the stock's opening price Friday. Growth Seek co-manager Chris Versace understands the potential industry headwinds ahead, but sees potential tailwinds compensating for any segment weaknesses.
"Given their Underweight rating and downside price target, I can understand why they would fan the flames," Versace said in a phone interview Friday. "But we just don't see it the same way, Under Armour has a number of potential markets to tap into."
Versace identified international expansion, increased investment in women's apparel, and more shelf space at primary vendors like Finish Line (FINL) and Foot Locker (FL) - Get Report -- a Trifecta Stocks holding -- as avenues that could drive the company's growth in spite of the perceived industry obstacles.
Last week Versace and Growth Seeker co-manager Lenore Hawkins noted that Nike's (NKE) - Get Report earnings call bode well for Under Armour after the former said that it expects excess inventory through its factory stores to be worked through during the current quarter.
"On a positive note, Nike was very bullish on the key sportswear category, which was mentioned 34 times during the earnings conference call," Versace and Hawkins wrote. "That category led growth in both the recently completed quarter and for the trailing 12 months, both domestically and internationally. We see this as extremely bullish for Under Armour, which will be attacking this category with its recently announced Under Armour Sportswear (UAS)."
While Morgan Stanley and the Growth Seeker team remain entrenched in their divergent opinions about Under Armour, Morgan Stanley's note emphasized that their downside view has less to do with the company itself and more to do with the current sports retail environment.
"Under Armour is a strong brand. Its founder and CEO, Kevin Plank, is one of the most highly successful entrepreneurs of his generation. The key debate is whether UA can meet the Street's high sales and margin expectations. Our analysis suggests it likely cannot," Morgan Stanley's note concluded.
This article was first published on Real Money at 2:35 p.m. ET on July 8.