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Under Armour Inc (UA): “I Will,” or Maybe I Won’t

Not This Again
Third, investors need to see that Under Armour is able to maintain a high gross margin. Last quarter, the company’s gross margin was 45.9%, which was second only to Lululemon Athletica inc. (NASDAQ:LULU) at 49.37%. Though Nike turned in a respectable 44.22%, the NIKE, Inc. (NYSE:NKE) brand is generally more broad-based than the other two, which accounts for the difference.

A fourth issue that Under Armour Inc (NYSE:UA) shareholders need to take a look at is the company’s inventory management. Several quarters ago, it seemed that management had solved this long-running problem. However, the company’s inventory compared to their current quarter sales was the highest among their peers in the last three months.

Nike is more established and should understandably have its inventory under control. The company did fairly well, with about 54% of current quarter sales held in inventory. Lululemon Athletica inc. (NASDAQ:LULU) is a much smaller company, but was able to manage with just 41.56% of sales in inventory.

Under Armour took a step backward and seemed to carry too much inventory at 68.6% of current quarter sales. Considering that NIKE, Inc. (NYSE:NKE) is more established, it would be one thing if Under Armour Inc (NYSE:UA) carried more inventory than its larger peer, but underperforming Lululemon Athletica inc. (NASDAQ:LULU) doesn’t make a lot of sense.

The Company Says “I Will,” But Maybe You Should Not
Under Armour’s new slogan is “I Will,” but the company’s next earnings report may decide whether or not shareholders say “I Will” to holding Under Armour Inc (NYSE:UA) stock. The company quite honestly needs to get inventory under control once and for all, and be more careful about their spending. Management also needs to make sure that its spending doesn’t trip up earnings growth.

Any time a stock trades for a P/E ratio that is nearly double its growth rate, the company needs to report good results. Under Armour shareholders will likely demand better results this next quarter than the company turned in a few months ago. Otherwise, the Under Armour growth story could be in trouble. Instead of saying “I Will,” investors just might say “I’ll Sell” instead.

Chad Henage has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica inc. (NASDAQ:LULU), Nike, and Under Armour Inc (NYSE:UA). The Motley Fool owns shares of NIKE, Inc. (NYSE:NKE) and Under Armour.

The article “I Will,” or Maybe I Won’t originally appeared on Fool.com.

Chad is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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