Replies to post #62 on Under Armour Inc (UAA)

[JohnCM]

Under Armour Continues To Fall Behind

Nov. 3, 2017 11:58 AM ET
Brent A. Miller - SA

Under Armour reported a revenue decrease of -5% to $1.4 billion in the 3rd quarter of 2017.

The company lowered full-year earnings per share forecast down to $0.18 to $0.20 growth from previous estimates of $0.37 to $0.40.

Competition, the apparent continued decline of athletic leisure apparel, and brand sentiment outweigh the opportunities to innovate, grow internationally, and through athlete partnerships in my opinion.

After Under Armour recently reported dismal 3rd quarter 2017 results, I have lost hope for a turnaround. The company has lost their strategy of being an innovative upscale brand in an unsuccessful effort to maintain sales growth through deep discounting. Given the fact that the stock is still expensive on a Price-to-Earnings (PE) ratio and no optimism on the horizon due to consumer sentiment and increased competition, I expect the stock to continue to decline.

In this article, I'll identify topics from the earnings report to support my opinion. In my September 25th, 2017 article on Under Armour (UA, UAA), I wrote:

“Even though this appears to be cheap given the stock’s previous high, I’m still not seeing anything in the near term that will help reverse the company’s slide.”

I continued with my conclusion stating that,

“Until the company is able to reverse brand sentiment, I would not recommend buying Under Armour’s stock.”

Both of these statements were made after the company reported 2nd quarter earnings and the stock hovering around $16.50 per share and a price-to-earnings ratio near 26. Investors were hoping the company’s stock was finally finding a bottom after seeing negative news mount in the past few months including the brand was “losing relevancy compared to a year ago" in the very important U.S. teen demographic, job cut announcement in the company's connected fitness business unit, FBR Capital lowering their price target after recent channel checks, and a downward trend in athletic-leisure clothing.

However, despite the perceived bottoming, the stock moved lower as a result of the 3rd quarter earnings release mainly due to management lowering the full year earnings per share forecast down to $0.18 to $0.20 compared to the previous $0.37 to $0.40 figure.

The reduction in earnings per share came as a result of revenue falling 5% to $1.4 billion from the same quarter in 2016. This is a huge step backwards for the company that touted their streak of double-digit revenue growth quarters in the past. While the company was able to grow international revenue with a 35% growth (or 34% currency neutral), it represents such a small mix of the company’s overall sales at approximately 22%. The biggest problem is in North America where sales decreased 12%.

The company attributed the decrease to the implementation of the company’s enterprise resource planning system and related service levels along with lower demand; however, I believe the problems are much deeper rooted than that. I think it goes back to the recent self-destruction of the company’s brand. There is certainly less demand being fought over by more competitors, but good brands like Under Armour should have the ability to focus on core competencies and rise above the rest.

Unfortunately, Under Armour resorted to discounted prices and offering higher promotions than usual, which is why the company is cutting their full-year earnings per share forecast in half. The company resorted to these measures as management faced pressure from the street over revenue growth.

Instead of staying the course by creating innovative products, focusing on marketing, and expanding internationally, the company went away from this long-term strategy. The key to this strategy was offering products that consumers would be willing to pay much more than competitors because of the superior quality and brand image. During the earning’s call, Kevin Plank stated:

“In no way, shape or form do we anticipate changing the pricing model that makes Under Armour special and unique”.

Despite this statement, actions speak louder than words. The company has placed their products in Kohl’s, a department store known for their cash back rewards, in an attempt to attract women to their brand. However, the problem is that once a consumer becomes accustomed to seeing products at a lower price as a result of promotions, they aren't likely to pay more unless they have brand loyalty. When comparing brand loyalty to the other sports apparel companies, Under Armour is lagging behind which is evidenced by athletic footwear results.

It’s no secret that the Under Armour is facing a highly competitive retail landscape that is constantly changing as consumer sentiment shifts. This was evident in the NPD Group’s August athletic footwear data report. Adidas sport footwear sales grew more than 50% the month and share grew to 13% to become #2 in the market segment.

While Adidas still remains behind Nike for the #1 spot, they are stealing Under Armour’s sales with this hyper growth. In response, Under Armour basketball sales were down half. For the industry, sales were relatively flat year-over-year, which really puts a damper on Under Armour’s prospects in this segment. This comes the same month as NBA superstar, Kevin Durant, made the comment that Under Armour basketball shoes are harming colleges that enter into exclusive basketball shoe deals with them.

“Nobody wants to play in Under Armour's. I’m sorry. The top kids don’t because they all play Nike,” said Kevin Durant.

Despite this statement and the overwhelming negative brand sentiment, a positive for Under Armour is that they are still securing key partners including Cam Newton, Bryce Harper, Stephen Curry, Tom Brady, and Jordan Spieth. This is certainly key because as long as the company maintains these relationships with top athletes in popular sports, it will allow the company to continue to be relevant. These relationships along with a focus on innovation give the company a chance going forward. With the acquisitions of MapMyRun, MapMyRide, MyFitnessPal, and Endomondo, the company has created a community of nearly 200 million registered users.

This type of engagement will certainly help brand sentiment as users will want to continue purchasing Under Armour’s products in order to access the community. Despite this effort, I believe the company is clearly failing to tread water.

While the stock has seen further declines, the PE ratio is currently hovering around its lowest price-to-earnings ratio near 28 and a stock price of approximately $12.50, the stock still isn’t considered cheap by that metric. Even though this appears to be cheap given the stock’s previous highs, I’ve started to lose hope for a turnaround and I’m still not seeing anything in the near term that will help reverse the company’s slide.

With the athletic-leisure apparel trend slowing in the United States and a more competitive environment, I think the company will continue to see tough challenges. Despite these negatives, the company does have an opportunity with international expansion, innovative connected fitness community, and partnerships with superstar athletes.

Until the company is able to reverse brand sentiment and get back to charging a premium for their products, I would not recommend buying Under Armour’s stock.