Under Armour (UA) faced a lot of negative publicity in both the national and international media during the past week. The U.S. speed skaters are not performing during the Olympic Games in Sochi. None of the U.S. speed skaters won an Olympic medal. According to the U.S. speed skaters, their innovative speed-skating suits are to blame for the lack of medals. Under Armour developed the U.S. speed-skating suits for several years now and the speed-skaters have never complained before. To support the pursuit of Olympic Medals in Sochi, Under Armour developed an innovative suit together with Lockheed Martin (LMT). The vents on the back of the suit are considered quite innovative; however, most of the complaints by the speed skaters are about these vents. The speed skaters stated that the vents slowed them down, rather than increased their speed.
According to this SA article, Under Armour will experience high international sales growth in the next years. I agree with the author's conclusion that "Under Armour's major driver of growth will be international sales". To achieve this goal, the company needs to increase their international brand awareness. One way to increase the international brand awareness is to close sponsorship deals with international athletes and associations. At this moment, Under Armour has several sponsorships, for example with London-based soccer team Tottenham Hotspurs and the U.S. speed-skating team (speed-skating is originally a European sport). Both sponsorships were sealed in 2011, when Under Armour replaced Nike (NKE) as the prime sponsor for the U.S. speed skaters and Puma (OTC:PMMAF) as the kit supplier for Tottenham Hotspurs.
If Under Armour's goal behind these sponsorships was to generate international media attention, the company most certainly succeeded during the first week of this Olympic Games in Sochi. There was a lot of media attention for the company all over the world. On top of that, the U.S. speed skaters decided to switch to their familiar speed-skating suits last Friday. Under Armour manufactured these suits prior to the innovative Olympic suits, however, the speed skaters were more confident in wearing these less 'innovative' suits, without the vents on the back. After the U.S. squad switched their suits on Friday, the results did not improve at all. This raises the question whether the problem was Under Armour's innovative suit in the first place. Nevertheless, the company generated a lot of negative publicity prior to the decision to switch to the old speed-skating suits.
International growth prospects intact
Several media outlets, including Businessweek, stated that the negative publicity regarding the speed-skating suits will harm Under Armour's sales. According to Businessweek:
"For foreign fans who haven't heard of Under Armour before, the Olympic debut was inauspicious to say the least. Even if the clothes work fine, nobody likes a loser."
"The ice-rink drama could also slow some promising momentum in cold-weather gear. Under Armour just released a line of lightweight winter wear dubbed ColdGear Infrared."
In my opinion, these statements are an overreaction to the negative publicity. First of all, Under Armour did get a lot of media attention and a lot of people who did not know about Under Armour before, do know the brand now. I doubt that Under Armour would be able to generate so much publicity if the U.S. speed-skating squad won several Olympic medals. In that case, the media focus would have been on the outstanding performance of the speed skaters, rather than the incredible suits they were wearing. Second, the U.S. speed skaters did not perform better after they switched to their old suits. Therefore, I do not recognize a direct link between Under Armour's suits and the underperformance by the U.S. speed skaters.
Investors fear that Under Armour's international growth is in jeopardy. As a result of the negative publicity, Under Armour's shares lost 2.38% and closed at $106 on Friday. In contrast to the opinion of several media outlets, I believe that the media attention could support Under Armour's international brand awareness. The speed skating suits did not have a major impact, given the performance of the U.S. speed skaters in other suits. Therefore, Under Armour's international growth prospects remain intact and this will prevent the share price from falling back even further. I find that the recent pull-back is an overreaction and a perfect investment opportunity for investors.
Finally, I would like to point out that Under Armour has a relatively high valuation. This may be a factor to consider. Under Armour trades at 70 times this year's earnings per share. The valuation is higher compared to competitors like Nike (24x 2014 EPS) and Lululemon (LULU) (27x 2014 EPS). On the other hand, Under Armour is likely to grow revenue and earnings per share at a much faster pace than Nike and Lululemon. Analysts expect that the company will grow earnings per share by at least an average of 20% per year by the end of 2015, compared to Nike's average of 9% per year and Lululemon's average of 8% per year.