Under Armour: Headed Further Under?

Under Armour (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 (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. (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

Comments

[john s. gordon:]

underarmour's product (polyester) is trendy but cotton is healthier/
polyester tends to promote bacterial colonies next to your skin & then you get bacterial cysts in private areas of your anatomy requiring intervention by a surgeon.
> jack

2008 Dec 12 08:22 AM

[Michael S.:]

From an EVA perspective UA has more downside at the moment. It is over-valued and carries signiificant risk. An investor's money is better spent, from an EVA perspective, in 2040 other Russell 3000 companies. You would have a better chance of turning a profit if you chose to short the stock instead.

2008 Dec 12 12:48 PM

[JW Goethe:]

1.) Plank will never sell UA
2.) UA isn't just trendy. Go to any Wawa or mini-mart where construction/outside workers go for lunch in the cold weather, and you will see many of these guys LOVE UA as a bottom layer for shirts.
3.) Watch the kids in the mall and you will see them wearing UA 5 to 1 over Nike in terms of shirts/hats/outerwear, etc. If UA grabs the same crowd with thei sneaks, they'll be in good shape.
4.) Nike, etc., is a dinosaur to kids compared to UA.

2008 Dec 12 01:17 PM

[Ames Tiedeman:]

Can Nike buy them or will the anti trust savages come out?

2008 Dec 13 05:49 PM

[Dean Sealtest:]

In response to JW Goethe:
1. In this economy (and things are only going to get worse)- No one is spending big bucks on Under Armour. As a seasoned investor and parent of three teenage/youth athletes - forget about the malls, go to the little league practices, football practices, high school and college baseball practices in the spring and fall and you will see these kids wearing Under Armour knockoffs purchased in Target, Walmart and Kohls. I know, as I have purchased these garments for my boys at a fraction of the cost of Under Armour. No one is paying top dollar when you can get the same thing for half the price.
2. How do you see what these construction guys are wearing as their bottom layer if they are wearing layers on top of the bottom layer?? Most of these construction workers wouldn't spend their hard earned money on this product if they can get the same thing for much less. I'll bet if you ask them to show you their bottom layer, it wont be UA.
3. I took my boys for new sneakers and they passed right by the UA display and went straight to the Adidas and Air Jordans. Under Armour is absolutely going down.


On Dec 12 01:17 PM JW Goethe wrote:

2008 Dec 14 02:34 PM