3 Reasons Investors Should Stay Cautious On Under Armour

In a note released Tuesday, Buckingham Research outlined three reasons as to why investors should stay cautious on Under Armour Inc UAA.

In pre-market trading, shares of Under Armour were down 4.09 percent to $18.11.

3 Reasons To Stay Cautious, Explained

Outlining the reasons, analyst Scott Krasik said there has been brand dilution amid new lower quality distribution, the athletic apparel category has seen slowing growth and there have been emerging issues in the long-term growth story for footwear.

Buckingham Research indicated that footwear declined 2 percent in the second quarter, with the growth in the second-half being distribution-driven.

The firm noted that Under Armour reported second-quarter results, which exceeded very low investor expectations. The company's loss of 3 cents per share was narrower than the firm's 7 cents per share loss estimate and the consensus loss estimate of 6 cents per share.

Sales rose 9 percent to $1.1 billion, marginally better than estimates, the firm noted. Regionally, the firm noted that North American sales remained flat but international sales surged up 57 percent.

Among categories, apparel sales, which accounted for 62 percent of the total sales, climbed 11.1 percent, footwear sales (21.5 percent) were up a more modest 2 percent and accessories sales (11.5 percent) rose a solid 21.7 percent.

Among other metrics, Buckingham Research noted that gross margin fell 190 basis points, more than the 170-basis-point-decline in forecast, amid the company's effort to aggressively manage inventory. Inventory rose 8 percent, in line with the sales growth, the firm added (see Krasik's track record here).

While lowering the guidance, the company announced a restructuring plan, on account of which it would incur charges for severance and other restructuring activities.

As such, Buckingham maintained its Underperform rating, with a $15 price target.

At time of publication, shares of Under Armour were down 7.39 percent at $18.54.