Under Armour's Deteriorating Financials

Summary

• Revenue growth has decelerated considerably.
• Margins continue to shrink.
• Operating Income is almost non existent now.

Under Armour's (UA, UAA) revenue as reported in their 10K for 2017 showed signs of deceleration and margins shrinkage causing their financials to deteriorate. Revenue stopped improving while their COGS (Cost of Goods Sold) and SG&A (Selling, General & Administrative Expense) continued their upward trend.

This all started in 2015 when the Total Revenue of the company started to decelerate. From an impressive 32.25% increase in 2014 to a marginal 3.15% in 2017. But, who can blame a company increasing its revenue at double digits per year? It wasn't until 2017 that the company apparently found its peak. 

COGS as % of Revenue also is showing signs of stress. In 2017 the company reported that for every $100.00 dollars in revenue it had to spend $55.02 to produce or buy the merchandise and services they sell. When in the past it was as low as $50.98 of expenses for every $100.00 in revenue. This may not seem much at first but an 8% increase in this expense can definitely hurt the bottom line especially if the other metrics also worsen.

SG&A as % of Revenue is even worse jumping 12% from its lowest point in 5 years. Following the same example of $100.00 in revenue the company reported in 2017 it spent $41.78 in this category. In the past and at its lowest point in 5 years it had reported that for every $100.00 in revenue it spent $37.29. It starts to add up doesn't it? 

Their Operating Income as % of Revenue has suffered dramatically because of what I just mentioned. It was a healthy 11.48% at its best year (2014) in the last five. In 2017 it was a anemic 0.57%. What this means is that for every $100.00 in revenue the company used to have $11.48 dollars as Operating Income from where to reinvest in growth of the company and now (2017) only showed a mere $0.57. This is not enough to even pay for interests generated by the debt they carry.

The overall revenue growth is still positive but has decelerated considerably. It is worth mentioning that the Net Revenue in the North American segment shrunk by 5.1% representing a total of $203M loss of income. This was offset by the continued growth in other segments. For example, the EMEA (Europe, Middle East & Africa) segment grew by $139M but this was in part because it was their full years of operations in Russia meaning that maybe next year they won't report such a big growth in that segment.

Reading further in the annual report we can find on page 12 a heading that reads "Our profitability may decline as a result of increasing pressure on pricing". This only points out that management is expecting to have even lower margins for this 2018. On top of that, think about the lower demand it already has in North America and you can realize that it is more than evident that in order to maintain market share it will be necessary to reduce prices hurting the bottom line even more.

I believe that a close eye needs to be kept at this metrics for the following quarters to see if financials stabilize or keep deteriorating before investing in this company. Being in an expanding economy and not having good margins is something to be worried about. What would happen if interest rates keep going up? What if the overall economy turns south?

Thanks for reading.

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