Retail Sector Doomed: Weak Holiday Sales Will Destroy Under Armour

by: Andrew Snyder September 24, 2008 | about stocks: AMZN / CCTYQ.PK / UA    

Andrew Snyder

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The retail sector will be significantly hurt by a slowdown in consumer spending this holiday season.  Companies like Circuit City (CC) could go out of business.  Others like Amazon (AMZN) and Under Armour (UA) will see big hits to their share price, giving options investors a fantastic profit opportunity.

I walked into my local home improvement store last weekend to drool over the newest series of stainless-steel grills.  I was greeted by a horrible surprise.

Instead of gawking at infrared meat-searing technology, pig-turning rotisseries, and deep fryers big enough to sizzle a herd of cattle, I was electronically wished a merry Christmas from a tacky plush Santa and his inflatable friends from the North Pole. We are just a day into fall and retailers are already throwing holiday sales in our face.

The way it is looking, retailers may need every sale they can get. According to a report released this morning, seasonal retail sales are expected to be drastically below 10-year averages (4.4% annual growth) and slightly below last year’s less-than-stellar activity (2.4% growth). In-store retail sales are expected to rise just 2.2% this year.

As if that figure is not bad enough, if you add in shrinking online retail sales, holiday revenues are expected to grow by just 1.5%.

Not a river of opportunity

That is not good news for companies like Amazon that rely solely on online sales. It is no wonder share price of the online giant is down by nearly 15% in the last few months.

Of course, Amazon is not the only company in this “doomed” sector. In fact, there are many other companies in much worse situations.

One company that will be lucky to make it out of the Christmas season alive is Circuit City. The company’s share price has plummeted from over $30 to just under $1.70 in the last 24 months. It stands almost no chance of making a profit this Christmas.

News of another slow season is not what shareholders need to increase their equity stakes. They need a buyout. Unfortunately, there are not too many investors willing to take on this company and its shrinking market share, even with a market valuation of just $280 million. Circuit City’s valuation will have to go much lower before a prospective buyer emerges.

Taking a short position on this company is tempting, but when the market is already pricing in a company’s imminent demise, even betting against a company is a risky bet. Besides, at $1.70 per share, the downside (which would be the upside in this case) is limited.

The end of the road

There are much better shorting opportunities out there. One of them is Under Armour. If there was ever a company that rode its marketing team’s coattails into overpriced bliss, it is Under Armour.

The company sells a fad product at very high prices. Once the retail market realizes there are much cheaper alternatives with the same product quality, this company will be praying for a government bailout of its own.

Take a second to look at the company’s financials and you will see what I mean. Under Armour’s P/E ratio is 43. Its revenues last year were $675 million and net income was just $41 million, yet it has a market cap well over $1.7 billion.

Share price was recently at a six-month high, but is now starting to fall. This is an opportunity begging for attention from short investors. I say you give it the attention it needs and deserves.

The Under Armour January 30 Puts [UAMF.X] are very attractive with a dull holiday season on the horizon and a company still showing the over-exuberance of a once-booming marketing scheme.

The best days are behind Under Armour and savvy investors should pay attention. This is a great opportunity to let the bear market work in your advantage and put some money in your pocket. Short Under Armour and watch this one fall.

Stock position: None.

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This article has 11 comments:

  •  
    Sep 24 05:04 AM
    Everybody is getting fruit cake this year, I don't want to hear any complaints! ;-)
    Reply | Link to Comment
  •  
    Sep 24 08:19 AM
    Blah, blah, blah...check out your local Dick's lately for a pair of UA sneakers? Unless you have a very unique foot size, they are probably sold out...and, oh yea, have you seen the growth abroad...especially in Asia...I doubt UA is looking at a great '08 Christmas season, but if you think that UA is a brand going to the dogs you are a fool.
    Reply | Link to Comment
  •  
    Sep 24 08:56 AM
    Hi Andrew. Why do you post such nonsense? One only needs to take a look at your previous submissions to see you do not have a very good ability at advising investors. You picked ABK in February @ $6 and it closed yesterday @ $3.48; you picked MRK in August @ $33.26 and it closed yesterday @ $30.75; you picked SWHC in February @ $4.70 and it closed yesterday @ $4.57. Your ONLY submission that has performed is GTXI up $2.48 since you picked it in April....your track record is way worse than UA's Christmas will be!

    I take it that, since you "advise many wealthy clients" on their investments, and you would post your "best bets" here on Alpha, that you have lost them a ton (A TON!) of cash...results count Andrew, and yours are terrible.
    Reply | Link to Comment
  •  
    Sep 24 09:28 AM
    Has anyone checked out this guy's past record?

    2/1/08 buy SWHC at or below 6 and hold for a year. 2/1/08 high/low 4.88/4.66. Current 4.57. High in August 7.77. But we are holding for a year. Not Great

    2/27/08 ABK high/low 12.47/11/76. Current 3.48

    4/3/08 GTXI 14/15 current 18.83. Not bad, not great.

    Anyone got a grain of salt?
    Reply | Link to Comment
  •  
    Sep 24 12:10 PM
    Andrew you are an idiot. Sorry to be so blunt, but when you publish crap like this that is the risk you take. From looking at your articles you cover broad and diverse business segments. Do yourself a favor...concentrate on ONE, become an expert on that. You have no credibility at this point.
    Reply | Link to Comment
  •  
    Sep 24 02:31 PM
    Actually, UA looks like a great short. But in reality, anything that touches a consumer is going to be a great short. UA is no crocs but margins are going to evaporate along with consumer wallets
    Reply | Link to Comment
  •  
    Sep 25 11:25 PM
    I like where you are going, but some ideas need some more quantifying here. For ex: UA is obviously a very controversial stock, so you'd expect people to slam you if you call it a short and do not back up the prose with any real analysis. One could just as much say that UA is oversold (down 45% over the last year) and is ready to burn shorts if they report a better than expected number. you have to admit that most stocks in this environment are not trading on fundamentals, so I would love to hear more from you on UA. CC is a dice roll and AMZN is too big for me. UA I can play with, so tel us more please
    Reply | Link to Comment
  •  
    Sep 27 09:53 AM
    Andrew,

    I'm working on a holiday retail trade of my own, could you please tell me which report released today (Wednesday) that you are referring to? Thanks.

    Nathan Grant
    nycnate@gmail.com
    Reply | Link to Comment
  •  
    Sep 29 10:27 PM
    people probably thought NIKE was a fad also. opportunity missed!
    Reply | Link to Comment
  •  
    Sep 30 05:32 PM
    unde armour is not by any means a fad, in my high school and in my current college people are buying everything from cleats, to backpacks, to sweaters. Crox was a fad and I shorted that and made 25k on it. However, Under armour is a company with staying power and even if it does underperform while the economy does. It still has a very strong following and an extremely strong brand name. Also, I visited some of its inventory clearing stores which were all packed even during times of economic durress. Clearly, the economic downturn will affect Under Armour, but not to the magnitude that this author ignorantly claims it will.
    Reply | Link to Comment
  •  
    Oct 03 08:40 PM
    Gotta love this product,great quality,probably will go a little further down,but I think that it will be rebound, and pay all who dare to ride
    long.
    Reply | Link to Comment
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