Analysts have set a very poor outlook for Baltimore’s most beloved sportswear manufacturer after the company announced this week that it missed its earnings mark for the fourth quarter of 2016 and has reduced its growth expectations for 2017.
Federally recognized credit rating agency Standard & Poor’s on Wednesday downgraded Under Armour’s rating from double-B-plus to triple-B-minus, better known as “junk status,” according to Barron’s. Bond credit ratings agency Moody’s also cut into the company’s 2017 credit rating outlook, switching it from stable to negative.
Weeks ago, this would have sounded like crazy talk about a company that has achieved annual revenue growth of 23 percent on average for the last five years. But while Under Armour hit record marks for revenue and earnings growth and once again posted 23-percent growth in all of 2016, the company revealed on Tuesday that its fourth quarter went much more poorly than expected.
In two moves that spooked investors further, the company set a comparatively low growth projection of 11 to 12 percent for 2017 and announced the departure of its chief financial officer, Chip Molloy, who joined up with the firm only last year.
In explaining its lowered revenue growth projection for 2017, CEO Kevin Plank cited “numerous challenges and disruptions in North American retail.” S&P factored this into its decision to drop Under Armour’s credit rating. Analysts also said the triple-B-minus rating “reflects continued underperformance compared to our revised forecast…slower growth than expected as a result of stiff competition from industry leaders Nike and Adidas or slower category growth, or higher than expected spending to fund growth.”
Moody’s analyst Mike Zuccaro said Under Armour “remains significantly concentrated” in that challenging North American retail environment, though he did say Moody’s expects the firm to adjust accordingsly to contain damage to its earnings.
Plank said in a statement Tuesday that Under Armour will invest more heavily in its products this year, at a $100 million expense to its operating revenue. Zuccaro said these investments in “key areas” are sensible and will make the company more competitive in the long term.
So, the good news is that despite Under Armour’s now-junky credit ratings and outlooks, investors still predict it can strengthen its market share over time with the proper adjustments and product development. That’s good news for a company that just saw its stock value drop 26 percent in a single day. Hopefully investors will jump back on board later in the year as the company continues to roll out innovative new sports gear.
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