Under Armour Won't Stage A Comeback
Summary
- Missteps have caused the brand to stall in North America.
- The company is cutting back on marketing initiatives.
- Competitors are creating bold, award-winning marketing campaigns.
- Under Armour lacks the aggressiveness it once had.
Under Armour recently reported a disastrous quarter and guidance that sent the stock crashing to 52-week lows. I can't say that I am surprised, as this is a stock that I've been negative on since 2016.
In August 2016, Under Armour stock was trading around $40 per share when I penned the article titled The Race Under Armour Will Lose. The article highlights that despite all the positive results Under Armour achieved, its brand image was weak in a diverse state like California and was going to be chewed up and spit out in favor of brands with far more "street cred" like Nike (NKE), Adidas (OTCQX:ADDYY), and others.
Later in 2016, I highlighted how Under Armour blew nearly $1 Billion on fitness apps in the article Under Armour's Billion Dollar Blunder. Needless to say, the apps haven't delivered for Under Armour, or investors, and is evidence of how poorly Under Armour has executed.
Since then, the stock has lost over 50% of its value and has essentially lost its momentum in the marketplace and with investors.
Source: Bloomberg
What Happened?
Certainly, I look back and wonder how I can repeat this type of forethought on other investments, as Under Armour's weakness drove me to buy more shares of Nike, one of the best-performing stocks I own.
However, if you read the comments of the articles I wrote in 2016, they are filled with bullish readers who seemed blind to what was about to come.
First, not all of Under Armour's struggles are self-inflicted. Stephen Curry, the company's flagship athlete, has lost some of his momentum, in part due to injuries and also just not being as fresh of a star in the public's eye. Jordan Speith, the company's flagship golfer, has struggled in recent years and is having a career that isn't uncommon in professional golf. The number of tour pros that have won a few major tournaments is long compared to the ones who've won year after year.
On the endorsement side, you can expect some hot/cold moments, certainly, Nike, Adidas, and others experience this. However, Under Armour hasn't really parlayed the relationship with Mr. Curry or Mr. Speith into any other notable endorsement in those sports. In fact, Mr. Curry nearly walked away from Under Armour in 2018, despite earning a reported $20M per year from the company.
Endorsements play a huge role for athletic apparel giants like Nike and Adidas. The fact is Under Armour has blundered more deals in this space that it's won. The company signed UCLA to a record $280 Million deal in 2016, only to have the school's student-athletes ditch the shoes for competitors.
Under Armour won the Major League Baseball on-field uniform contract that was set to begin this year - only to back out of the deal. How many leagues/athletes in the future will want to deal with Under Armour if they are backing out of multi-million dollar deals?
Endorsements aren't the only blunders Under Armour has experienced. The company scored a prominent location on 5th Avenue in New York to open a flagship location, only to likely forego opening due to poor financial results.
The company has struggled mightily with inventory. Anecdotal trips to TJ Maxx (TJX), Ross Stores (ROST) often revealed rows of Under Armour merchandise, let alone the inventory balance on the company's financial statements. There are even reports, then CEO Kevin Plank forced the company to keep a poor selling shoe on the market simply because it was named after his wife.
Finally, the company is currently under investigation by the SEC for allegedly pulling forward sales in order to maintain a growth rate it achieved years ago.
All these failures have caused Under Armour's revenue to stall out in the United States, which has been steady over the past 3 years. While the International revenue continues to grow, the rate of growth is likely to stall out as the North American revenue has.
Under Armour Revenues:
2019: $3.7b North America / $1.5b International 2018: $3.7b North America / $1.3b International 2017: $3.8b North America / $1.1b International Source: Press Releases
Net income for Under Armour in 2019 turned positive after the metric took a hit for restructuring in the prior years. Noted on the company's recent 2020 guidance was a plan for an estimated $325M - $425M in restructuring charges for the year, pending board review.
Under Armour Net Income:
2019: $92M 2018: ($46M) 2017: ($48M) Source: Press Releases
While the company isn't in a dire financial situation, with $788M in cash - it's balanced out a bit having $593M in debt (thanks to the dreadful connected fitness acquisitions).
Ultimately, the company doesn't really have the financial leverage to sign top athletes, celebrities, and teams - which has proven to be a successful driver of sales for competitors such as Nike and Adidas.
Can Under Armour Bounce Back?
Stocks gain and lose momentum all the time. With Under Armour, the recipe to get back on track is difficult because the sports apparel market is driven by marketing and sponsorships.
Revenues have been stagnated at Under Armour for 3 years, despite a steady increase in marketing expense:
2019: 579.0M 2018: 559.7M 2017: 565.2M Source: Annual Report p. 34
This is showing that Under Armour's marketing efforts are not particularly effective at growing revenues. Not only does Nike have a roster of athletes (Tiger Woods, Michael Jordan, LeBron James, Zion Williamson, etc.) that dominates Under Armour - Nike marketing efforts are far more memorable.
Take, for example, the controversial Nike ad featuring Colin Kaepernick. The ad won an Emmy for Best Commercial in 2018.
When the market leader (Nike) is taking huge risks creating ads that feature controversial athletes - Under Armour can't just sit around and play it safe. But that's exactly what they do, by creating ads like this.
Ultimately, the company isn't doing the things necessary to reinvigorate the brand, which is, ultimately, why the stock will continue to struggle.
Conclusions
Instead of being aggressive, Under Armour is scaling back. The failed MLB license and NYC flagship store closure are examples of this. The fact the company hasn't signed a notable NBA athlete, besides Stephen Curry, has hurt the company's momentum in footwear.
This is a brand that is destined to win a bronze medal (at best) when compared to Nike, Adidas, and others. In investing, winning gold and dominating your market is the best way to benefit as a common shareholder in the long run. Under Armour's best days are gone - and likely won't return unless a drastic overhaul is achieved.
I view the odds of that to be slim, and even with the recent pull-back in share price, Under Armour isn't an attractive investment from both a fundamental and valuation perspective. The fact higher-quality companies have sold off due to coronavirus, I'd avoid lower-quality names like Under Armour in favor of market leaders.
This article was written by
Analyst’s Disclosure: I am/we are long NKE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (58)
@Just Trying to Make a Living Good question, I have not stepped into this one - primarily because my Nike investment has run a considerable amount to where it doesn't really make a lot of sense to add this name as well. However, it would have been a nice move - UA's done a nice job since Plank left.
