Underneath Under Armour’s Compressed Margins

Under Armour’s (UAA) gross margin fell 160 basis points to 46.5% in fiscal 2016. Its gross margin took the worst hit in the fourth quarter, falling a whopping 300 basis points to 44.8% in 4Q16—primarily on account of aggressive inventory management, negative currency effects, and a higher mix of footwear and international businesses.

UAA’s operating margin plunged 240 basis points to 12.7% in 4Q16 as SG&A (selling, general, and administrative) expenses surged 6%, resulting from the company’s ongoing investments in footwear, international, and DTC segments.

Notably, Under Armour has the lowest operating margin in the sportswear peer group. It has a trailing-12-month operating margin of 7.8%, as compared to Nike’s (NKE), Lululemon Athletica’s (LULU), and Columbia Sportswear’s (COLM) 13.6%, 17%, and 9%, respectively.

Notably, Under Armour has missed its bottom line estimates in two of the past four quarters. The company’s 4Q16 adjusted earnings per diluted share stood at 23 cents—$0.02 lower than the analyst expectations. Its EPS fell 4% YoY (year-over-year), driven by lower revenues, a lower gross margin, and a higher SG&A rate. UAA’s management and Wall Street are predicting a net loss for 1Q17.

ETF investors seeking to add exposure to UAA can consider the PowerShares S&P 500 High Beta Portfolio (SPHB), which invests 0.85% of its portfolio in the company.

Continue to the next part for a discussion of UAA’s profitability outlook for fiscal 2017.