Why Has Under Armour (UA) Suddenly Lost Investor Favor?

Shares of Under Armour, Inc. (NYSE:UA) , which have shown the tremendous growth rate of more than 287% over the past five years, have been struggling over the past three months. In fact, the Zacks Rank #4 (Sell) company’s shares declined more than 9% during the period. Let’s find out why the company’s stock is on the downtrend.

Risks from Higher Inventory and Debt

There is no denying the fact that both the top line and bottom line of Under Armour have shown tremendous improvement over the past few quarters. But the recent increase in inventory and debt is a serious concern for the company. In the last reported quarter, the company’s inventory growth stood at 44%, which was much higher than the company’s revenue growth of 30%. Notably, this for the third consecutive quarter in which inventory growth surpassed top-line growth.

The company’s debt increased significantly in the previous quarter. The company recorded debt of $935 million in the first quarter of 2016 as against $677 million in the prior-year quarter. Further, Under Armour projected an increase in interest expenses to approximately $35 million in 2016 on account of higher debt levels. This is likely to weigh on the company’s bottom line.

Trimmed Guidance

Under Armour trimmed its 2016 outlook after one of its major customers, The Sports Authority, faced bankruptcy. For the second quarter, Under Armour anticipates impairment charge of nearly $23 million related to The Sports Authority. Previously, the company had estimated sales of $163 million from the latter. Now that the sports retailer has filed for bankruptcy, Under Armour is likely to recognize only $43 million of the sales.

The company now expects net revenues for 2016 to be nearly $4.925 billion as against the previous estimate of net revenue of about $5 billion. Nonetheless, this represents an increase of 24% over the 2015 level. Operating income is expected to be in the range of $440 million to $445 million, down from the previous estimate of $503 million to $507 million.

For the second quarter, the company continues to project revenue growth in the high 20% range. However, operating income is expected to be in the range of $17–$19 million as against the previous estimate of $40–$42 million.

Downward Estimate Revisions

Following the view cut, the Zacks Consensus Estimate has been witnessing a downward revision. Over the past 30 days, the Zacks Consensus Estimate for second quarter has plunged 50% to 2 cents. Also, the Zacks Consensus Estimate for 2016 and 2017 have moved down by 7 cents and 5 cents to 60 cents and 80 cents, respectively in the same time frame.

Stocks to Consider

Some better-ranked stocks in the retail sector include Delta Apparel Inc. (NYSE:DLA) , Hanesbrands Inc. (NYSE:HBI) and Perry Ellis International Inc. (NASDAQ:PERY) . Delta Apparel sports a Zacks Rank #1 (Strong Buy), while Hanesbrands and Perry Ellis International hold a Zacks Rank #2 (Buy).