Shares of Under Armour (NYSE: UA)(NYSE: UAA) were pulling back today in sympathy with a disappointing earnings report from Nike (NYSE: NKE). While there was no company-specific news out on Under Armour, the weak results from its larger rival were enough to push the stock lower today.
As of 11:56 a.m. ET, Under Armour shares were down 5.5%, while Nike stock was off 11.5%.
Nike's fiscal first-quarter performance was actually in line with estimates, though its guidance for the upcoming holiday quarter seemed to spook investors. Nike's revenue in the quarter rose 4%, or 10% in currency-neutral terms, to $12.69 billion, which beat estimates at $12.27 billion.
Rising freight costs and higher markdowns ate into profits with Nike's gross margin falling 220 basis points to 44.3%, and its net income declining 22% to $1.47 billion. Earnings per share fell 20% to $0.93, beating estimates by a penny.
Like much of the retail industry, Nike also reported bloated inventory levels with inventories up 44% to $9.7 billion. CFO Matthew Friend said he expected the holiday season to be promotional with the company forecasting a 350-400 basis point decline in gross margin.
Nike's fiscal quarter ended Aug. 31 so its results are especially influential on its peers like Under Armour, which will report quarterly earnings in a month. Nike's report covers two of the three months in Under Armour's upcoming fiscal second-quarter report.
Like Nike, Under Armour reported weak revenue growth in its most recent quarter, and rising costs from freight and increased markdowns for the year. It also slashed its profit guidance for the year, calling for adjusted earnings per share of $0.47-$0.53, down from a prior range of $0.63-$0.68.
The company did do a better job of controlling its inventories than Nike. Its inventory rose just 8%, but Wall Street may lower its estimates following the Nike update.
After a brand implosion several years ago, Under Armour has been unable to regain the growth momentum it once enjoyed, and the stock now trades like a value stock rather than a growth stock. The macro headwinds and broader challenges Nike cited are likely to make the holiday season a difficult one for Under Armour.
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Jeremy Bowman has positions in Nike. The Motley Fool has positions in and recommends Nike and Under Armour (C Shares). The Motley Fool recommends Under Armour (A Shares). The Motley Fool has a disclosure policy.