Under Armour: Headed Further Under?

Includes: LULU, NKE, UAA
by: Ari Blaine

Under Armour (NYSE:UA) seems like a good short at these levels. The company specializes in making fantastic athletic wear as well as footwear at rather high price points. Tee shirts run around $25 and turtlenecks for $50.

The company’s CEO, Kevin Plank, was on CNBC Wednesday discussing his company's launch into the running shoe category. This is a category dominated by Nike (NYSE:NKE) and is bound to be quite competitive and challenging for UA. The pricing of the running shoes, according to Plank, was in the $80-120 price range.

What I found interesting about the interview was when the discussion about the economy and its impact on Under Armour came up, the CEO said "we don’t harp on things we can’t control; we call that 'Loser Talk'." Well “Loser Talk” is what you better be focused on internally because unemployment is rising, the economy is in shambles and this will most certainly affect UA more than the competition from Nike.

Plank also dodged answering how business would be (not reiterating any guidance what so-ever). The company is slated to do 1.10 this year on revenues of 756 million (this was the revised down numbers they gave in late October). Next year, the company is slated to do 1.30 on 921 million in revenue. If these numbers don’t need to be reduced further, then the company is trading close to 25x this year’s EPS and 21x forward numbers.

In this market, with consumer spending crumbling, there is a good chance that UA will have to cut their numbers further for 2009. The fact that the CEO had a chance on CNBC to reiterate his guidance and refrained from taking the opportunity to do so is a warning sign (at least in my eyes).

As for other high end retailers; Lululemon Athletic Inc. (NASDAQ:LULU), maker of high-end yoga apparel, just reported terrible numbers (see conference call transcript) and their stock was down 25% yesterday.

On December 4th, Jim Cramer the host of Mad Money on CNBC, mentioned that NKE should buy UA; I couldn’t agree more and if I were Mark Parker (CEO of NKE) I would wait and see if UA slips and try and buy them on the cheap.

If you are scared that a buyout could occur prior to the potential collapse of UA stock price, you can buy a Jan 30 call at under $2, protecting yourself through January; or look for an option strategy for a longer period. UA has rallied off the lows of around 18 for a 50% move. Should the company have to lower guidance we could be looking at a $10-12 stock.

Disclosure: Writer is not long or short UA or UA options nor has any positions in NKE or LULU