Not Looking Good For Under Armour At These Levels

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

With disappointing results from other high-end retail brands, Under Armour (NYSE: UA) investors face a scary earnings report on January 31. A leading developer and marketer of athletic apparel and footwear has already seen a significant decline providing some solace that any weak results might already be priced into the stock.

The main concerns come from retail peers such as Coach (NYSE: COH) and Lululemon Athletica (NASDAQ: LULU) that have reported disappointing holiday sales suggesting that the high-end brands might have struggled to meet ever increasing analyst expectations.

As late as October, Under Armour traded near all-time highs over $60 and yet after the recent drop the stock trades for an enormous 30x forward earnings.

Earnings expectations

While the company historically has beat earnings estimates by a one or two cents each quarter, analysts have dropped expectations for the next few quarters. In fact, the 2013 estimates have dropped to $1.50 from $1.54 over the last 90 days.

The estimates still forecast a 25% gain next year though the stock trades at over 31x estimates. The forecasts are for only 21% 5-year growth rates.

Coach results

The luxury handbag maker reported Q2 results that missed analyst estimates by $0.05 causing the stock to plunge 15%. The company only reported earnings that rose 4% over last year further suggesting a difficult retail market.

The company reported that North American holiday sales proved challenging. On the flip side, the company got huge gains in China with same-store sales rising at double-digit rates.

With revenue expected to hit over $5B in fiscal year 2013 that ends in June, it also hints at the issue with reaching a size that limits the ability to grow fast. While less than half the size, Under Armour is now reaching the $2B sales level.

Lululemon results

While Coach is more of a stretch as a comparison, Lululemon directly competes in the high-end performance athletic sector for the consumer dollar. Whether consumers continue to buy $70 yoga pants from Lululemon or equally expensive sweatshirts made by Under Armour isn’t really in question. The issue is whether the tremendous growth can be sustained to keep the stock prices at these levels.

Lululemon guided towards $0.74 in the Q4 holiday period that slightly missed the analysts’ estimates of $0.75. Analysts continue to be upbeat about next year’s earnings with expectations of 23% growth. The stock though trades at a similar 30x forward earnings expectations making it difficult for stock gains at those levels.

Stock Valuation

As mentioned above, Under Armour remains on the pricey side requiring strong execution from the company in order to justify the existing valuation. Any slip up, certainly possible as other high-end brands have struggled to keep up with estimates, could send the stock tumbling further. The stock could quickly drop to trading at 20x reduced forward earnings especially if the sudden resignation of the footwear executive is an indication of pending weak sales.

Conclusion

Under Armour appears to have exceedingly higher downside risk after earnings are reported next week. With the revenue base expected to surpass $2B in 2013, it will become increasingly difficult for the company to grow the revenue base over 20% each year.

Some investors might be willing to pay up for growth, but this well run athletic brand has reached levels where growth will be difficult to sustain. The news out of Lululemon highlights the potential downside looming. While readers might think using Coach as an example is a stretch, it does shed further light on the risks in the high-end brands after a disappointing holiday season for retail. In fact, the 16% drop by Coach might only be magnified by an Under Armour warning.


Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool recommends Coach, Lululemon Athletica, and Under Armour. The Motley Fool owns shares of Coach and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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