Here's the upset Under Armour short-sellers wanted.
Shares in the athletic-gear maker plunged by as much as 15 percent on Tuesday after it said it can't deliver on lofty full-year operating profit promises it made last year. It also painted a stark picture of a slowing market for U.S. sports apparel -- once Under Armour's lifeblood.
With sales of shirts and shorts slowing in the U.S., Under Armour plans to focus on faster-growing businesses such as footwear and high fashion, while building out more retail stores, increasing its digital offerings, and entering new international markets.
The only problem is, such big investments take money, which bite into the company's bottom line.
In an age when too many companies manage for quarterly results aimed at pleasing Wall Street, rather than executing a long-term vision aimed at pleasing customers, it's refreshing to hear a company prioritize technology and building a better direct-to-consumer business.
But the defensive tone Under Armour CEO Kevin Plank took on the earnings call Tuesday suggests the change isn't just a high-minded strategy shift, but a necessary reaction to slowing sales at U.S. retailers. Under Armour's response ratchets up the competition with Nike and Adidas. It must fundamentally change the way it does business as it expands into footwear and international markets. And the marketing spending required to take share from these giants will likely be higher than investors expect.
The steep stock drop was validation for Under Armour short-sellers, who had piled in after watching the company's valuation shoot past 80 times forward earnings. (With Tuesday's selloff, it's trading around 45 times forward earnings, compared to Nike's multiple of 21). As my colleague Tara Lachapelle pointed out, Under Armour was this year's "most-shorted" member of the S&P 500.
The short interest contrasted with the cheery attitude of Wall Street, which remained bullish on Under Armour even as the stock began to fall and the gap between the average 12-month analyst price target and the actual stock price widened to its highest point ever. On Tuesday, some Wall Street analysts finally began downgrading Under Armour stock.
Tuesday's tumble doesn't mean Under Armour's dream of taking on Nike and Adidas won't come true. Under Armour could do what Plank is promising and follow in Amazon's footsteps, plunging money into the business to grab market share until it has enough customers that it's able to raise prices and turn a more meaningful profit.
But as long-term Amazon followers know, it's hard to gauge the success of such a strategy in the short term. With Under Armour telling investors Tuesday that it won't grow operating income for the foreseeable future, its revenue numbers become even more important in judging whether the company is actually staying on track.
To win this kind of game, Under Armour will have to keep quarterly growth figures above 20 percent and reach its 2018 revenue target of $7.5 billion. It will also have to show market-share gains in footwear and fast progress in its international businesses. In any case, it's time to hustle.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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