Updated: 2 days ago
"Under Armour has been a tough stock to own for the last few years, but is it worth owning now?"
Under Armour (NYSE:UA)(NYSE:UAA) got its start back in 1996 by founder Kevin Plank, who started the business from his grandmother's basement. The performance apparel business would eventually become a multi billion dollar publicly listed company with high growth and rapid expansion. Fast forward to 2019 we find Kevin Plank announces he is stepping down as CEO to be replaced by Chief Operating Officer Patrik Frisk as of Jan 1 2020, so what happened?
The great high growth company is no more, it has seen its fortunes turn sour with several years of disappointing performance, a toxic work environment. Worse, we found that Federal authorities are investigating Under Armour Inc.’s accounting practices to determine if the sportswear maker shifted sales from quarter to quarter.
Not surprisingly Under Armour was not in a good position when Covid -19 hit. They were already in a multi year transition to get sales and growth going again when the pandemic hit them. Unfortunately for shareholders the stock took a massive hit, going from around $20 all the way down to almost $7, however it is now trading in a tighter range of around $9 to $10 and a market cap of just $4 billion.
A lot of things went wrong, including shrinking popularity, falling sales , high inventory, and as reported by The Wall Street Journal that detailed about executives going to strip clubs and expensing the outings. Add a federal probe to the list of issues while their competitors such as Nike continue to take market share. There is almost nothing to like about this company. In fact a rumour of the possible sale of its MyFitnessPal app which was acquired for $475 million and had approximately 80 million users, would be a tough pill to swallow.
Looking at Covid-19 the company took a hit when they reported back in May First quarter results where apparel revenue decreased 23 percent to $598 million, Footwear revenue decreased 28 percent to $210 million, Accessories revenue decreased 17 percent to $68 million. Under Armour has in fact withdrawn their 2020 outlook so we have no clarity on what to expect from them going forward.
Under Armour has continued to bleed money, witnessed slower overall sales and is in a tough position. But they have taken steps over the last few years to try and improve their digital transformation to a full omni-channel approach such as the new SAP HANA platform, although not without hiccups. They have also been working to improve their brand by managing inventory better and move more into a more direct-to-consumer model. These initiatives will take time to fully implement.
One area that Under Armour does have control over is cost cutting and this is what they plan to do. First the athletic apparel company said it plans to cut about $325 million in operating costs in 2020. Secondly Under Armour is finally looking seriously at their multi million dollar partnership programs. Starting with the termination of the record-setting $280-million deal they signed with UCLA back in 2016. This is actually net positive as it's questionable if these sponsorships have helped translate into sales The company also has nixed plans for a flagship store on Fifth Avenue in New York, another positive as their focus should be investments on their digital platforms and less on physical locations.
The key to success is to continue to build out a better digital direct to consumer experience instead of focusing on wholesale retails. Under Armour unfortunately has relied too heavily on its wholesale partners in the past, including some department stores such as Khols which have also been hit hard by declining sales even before Covid-19 hit .
Under Armour still has a good brand but it has been late to the game which has helped their competitors get a head and take share. Competition has caused Under Armour to lose market share as well as forcing them to discount in order for them to get rid of inventory while also spending more on marketing efforts. This is not a good combination to have.
The good news is a new CEO has taken over and he is taking the required measures to right the ship with cost cutting, capex reductions (160 million down to $100 million), reviewing their sponsorship programs and investing in direct to consumer. These will help Under Armour turn around. Unfortunately challenges will persist and this is a multi year turnaround so expect shares to continue to be pressured for the next year.
“This is a longer term turnaround story, potential investors will need to be patient with Under Armour. ”
Is under Armour stock a buy?
This is a turnaround, not a high growth story so Under Armour can be considered a stock to hold at best. Until we get more clarity on where Under Armour is going, It may not be a stock to buy heavily into. Additionally Under Armour's stock is not considered significantly overpriced but it's unlikely to see any serious appreciation until sales and revenue growth returns.
Apparel Stocks to Buy
There are other stocks that are doing much better such as Levi Strauss & Co. (LEVI) and Nike Inc (NKE). These may be better stocks to buy as they have done reasonably well this past year. In fact we currently like LEVI stock the most.
Disclosure: mysmallbank.com nor the author received any compensation from any securities highlighted in this article. The article is our opinion only and is written to help readers learn more about the stocks mentioned in this article. Consider this as basic information only and utilize professional services and additional sources before making an investment decision.