Retail sector doomed: Weak holiday sales will destroy Under Armour (UA)
Today's Financial News - Posted September 23, 2008
The retail sector will be significantly hurt by a slowdown in consumer spending this holiday season. Companies like Circuit City (NYSE:CC) could go out of business. Others like Amazon (NASDAQ:AMZN) and Under Armour (NYSE:UA) will see big hits to their share price, giving options investors a fantastic profit opportunity.
By Andrew Snyder
Baltimore – (TFN): I walked into my local home improvement store this 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 (NASDAQ:AMZN) 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 (NYSE:CC). 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 case) is limited.
The end of the road
There are much better shorting opportunities out there. One of them is Under Armour (UA:NYSE). 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.
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September 24th, 2008 at 10:28 am
Are you for real Andrew? You are NOT in expert as you are all over the board in sectors that you report on. You have really blown it with this unfounded article on Under Armour. I hope they sue you.