Under Armour Deserves a Discount

By Anonymous

A glance at its stock this year suggests that Under Armour UAA -1.27% has returned to the growth trajectory that marked its rise as an athletic-wear giant. Shares are up 40% after finishing 2017 as one of the worst performers in the S&P 500.

The reality is the rebound has been driven more by the strong economy than a turnaround at Under Armour, which still hasn’t addressed its underlying problems. Those include persistent discounting, slowing revenue growth, churn in its executive offices, and a leader who seems distracted. CEO Kevin Plank opened a private investment firm, Plank Industries, in 2017. Analysts worry that he is more interested in whiskey-distilling and racehorse-breeding than in fixing Under Armour’s flagging operation.

In July the company reported a net loss that widened to $95.5 million, from $12.3 million a year previously. Revenue rose 8% to $1.17 billion but improvements on that front were mostly due to an increase in off-price sales. As the company’s sales to Dick’s Sporting Goods have declined, it has entered Kohl’s and other discount retailers, like DSW and Famous Footwear.

When Dick’s reported a drop in quarterly sales last week, CEO Ed Stackpartly blamed Under Armour’s decision to sell more to those discount stores. In the long term, that move hurts Under Armour’s ability to sell at full price.  Analysts have suggested that Under Armour is becoming more like Reebok than Nike .

The company’s sales growth guidance for the year has fallen to an anemic 3%-4%. Meanwhile, the company has been cash flow negative for years.

Another problem is inventory levels, a legacy of the company’s years of unabated growth. Inventory was expected to rise by 20% in the second quarter but was only up 11% year-over-year in part by increasing off-price sales. That cycle of discounting likely will continue the rest of the year, hurting sales or margins or both.

The company is touting its rapid growth in international markets, up 28% in the past quarter, but that is from a small base. To boost overseas growth enough to offset its slowdown at home, Under Armour will have to beat other, healthier companies, like Nike and Lululemon , that are also chasing consumers abroad.

Mr. Plank has claimed that he is focused on turning around the company, not on his other pursuits with Plank Industries. But analysts are less than convinced. While the company talks a good game on earnings calls about elevating the brand, it isn’t actually taking the steps to do so.

As Nike sells through at full-price, Under Armour has consigned itself to the sale aisle of Kohl’s.

Write to Elizabeth Winkler at [email protected]