Coverage: Under Armour’s stock drops after earnings strike out

Sports apparel company Under Armour saw its stock drop by more than 25 percent on Tuesday after the company broke a string of 20-percent revenue growth quarters and posted just 12 percent growth for the fourth quarter.

Krystina Gustafson of CNBC.com had the news:

Heavy promotions, high inventory levels and the ripple effects of Sports Authority’s bankruptcy all weighed on the company’s results, and those pressures are expected to continue in 2017.

Investors fled Under Armour’s stock Tuesday, after the company said CFO Chip Molloy will leave in February, and issued a weak revenue forecast of nearly $5.4 billion. That would represent growth of 11 to 12 percent this year. Shares of Under Armour were last changing hands at $21.54, a decline of 26 percent.

“Retail without question is being disrupted,” CEO Kevin Plank told analysts. “[But] we believe that we own a large part of it.”

Bricks-and-mortar players have released a steady stream of disappointing holiday results over the last month. Yet many thought that Under Armour, a relatively young company, would continue to best the broader market. Although its 12 percent growth did, in fact, outperform the sector as a whole, the rate of its deceleration spooked investors.

Marc Bain of Quartz noted the company was also hurt by a change in fashion:

Still, most of its products are performance apparel, and the buff mannequins at the company’s retail stores suggest a muscle-bound clientele. Even the brand’s signature sneakers for NBA star Stephen Curry have had trouble crossing over to a non-athletic audience.

The company has seen galloping growth, doubling its sales every three years since it went public in 2005. But today the brand’s stock price took its biggest tumble in nine years on news that its sales forecast for 2017 came in lower than analysts’ estimates—coupled with poor last-quarter results and a leadership shuffle. The company is expecting sales to grow just 12 percent this year, to nearly $5.4 billion.

The drop in valuation in itself may not be that alarming—Under Armour is arguably overvalued compared to its peers. Still, it’s a wake-up call: The company must accept that it can’t rely solely on its performance wear. The sportswear landscape is shifting, and customers no longer want athletic clothes just for working out. They want stylish athleisure—clothes fashionable enough that they can also wear them out to a movie or dinner.

If Under Armour is to compete with brands such as Nike and Adidas, that’s one area where it needs to do better. “We need to become more fashionable with the products we have out there,” Plank admitted on a call with investors today, looking back on its tough end to 2016.

John Kell of Fortune noted that Under Armour is affected more by North American sales than Nike or Adidas:

The brand is more affected than rivals like Nike and German-based Adidas because 85% of revenue still comes from the North America market. Plank also said there was slower retail traffic, more promotions at an earlier point in the holiday season and deeper discounting than in years past.

“I want to be clear, our growth story is intact,” Plank said in a presentation to analysts. “What you won’t hear from us today are excuses.”

Investors, however, sent shares sharply lower mainly because Under Armour projected 2017 revenue to grow between 11% to 12% to reach nearly $5.4 billion. Wall Street analysts had expected $6.05 billion—a figure that implies another year of 20%+ growth, which Under Armour had consistently been posting as it recorded lightning-fast growth that has outpaced the sports apparel market. Fourth-quarter figures—revenue of $1.3 billion and per-share profit of 23 cents—also missed expectations.

The bankruptcies of Sports Authority, City Sports and other sports retailers in recent months has stung Under Armour, which like other sports brands, relies on a wholesale business model to get greater retail shelf space. Because of the softness of brick-and-mortar retail, some rivals—notably Nike and Adidas—have touted their efforts to invest in their own retail presence to essentially take control of their own destiny. The softness in traffic at department stores, specialty stores and big-box retailers have led other apparel makers, most notably luxury brands, to also rethink their wholesale strategy.