It didn’t take long for Under Armour Inc (UA) to drop from “Greatest Of All Time” to just your run-of-the-mill goat. From an upstart sports apparel company to one causing iconic Nike Inc (NKE) frets, Under Armour has caused quite a storm within the industry. But now it looks like UA stock is stuck in one.
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For the current month, Under Armour stock is down 15%. The media was quick to blame the departure of key personnel, including Chief Merchandising Officer Henry Stafford.
But can one person really make that big of a difference? If you’ve bought UA stock recently, that answer is a resounding yes.
But even from a casual observer’s perspective, Stafford was instrumental in growing Under Armour sales to the phenomenal rates that Wall Street has come to expect.
The company is overwhelmingly an apparel outfitter. They’re not making the bulk of their sales from socks, shoes and jock straps. As such, they need to protect their core business unit. Stafford did that, and brought a whole new dimension to UA.
The story starts in the few years following the Great Recession. Looking for a way to go after sporting giants Nike and adidas AG (ADR) (ADDYY), Under Armour set out on a very aggressive goal. Over time, UA wants to get more than 50% of its top-line sales internationally.
Their shorter-term target back then was for global sales to account for 12% of total revenue by 2016. Stafford was virtually right on target. As seen in the graph above, for the fiscal year ending 2015, international sales for Under Armour were 11% of its total haul.
The significance of Stafford to UA stock is difficult to overstate. At the start of the decade, Under Armour was at the basement floor when it came to global recognition. But within a short amount of time, Under Armour began making serious inroads, primarily with their soccer kit sponsorship of English Premier League club Tottenham Hotspur, beginning from the 2012 season through 2017.
The deal itself was pure genius.
Unless you’ve been living under a rock, soccer is the biggest sport in the world. For only about $16 million a season, UA stock has been getting exposure to an enormously popular soccer league.
UA got an even bigger bonus when Tottenham came in third place this past season, guaranteeing it a spot in next year’s UEFA Champions League. Loosely, this is Europe’s equivalent to the playoff run to the Super Bowl.
Under Armour continued its push for global sporting relevance by signing a kit sponsorship deal last month with Southhampton, another EPL club. Southhampton is a middling team (read less costly), but one that is making significant strides over the past few seasons. In theory, the deal makes a lot of sense for UA stock.
In practice, it’s a different ballgame.
Very simply, sports sponsorships are getting too expensive, even for the industry giants. This was exemplified by the sudden split between former EPL champion Chelsea and their kit sponsor Adidas. Although reasons weren’t specified, it’s not hard to read between the lines. Adidas’ profit margins are only slightly better than competitors’ averages, and substantially below that of NKE.
In other words, Adidas has to be selective in whom or in what they endorse.
At the same time, they cannot sit back and potentially miss out on lucrative opportunities. UA stock has until recently been riding the arm of National Football League superstar Tom Brady. In response, NKE has aggressively stepped up their endorsements.
The problem is that in order to get the big payout, the upfront cost keeps rising. This gets obvious when you compare balance sheets.
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While Adidas saw a modest lift in long-term debt over the last four years, Nike’s debt jumped 798%. That, however, pales in comparison to Under Armour, which skyrocketed from $53 million to $768 million, or a 1,349% leap.
Of course, debt is not the end all, be all. But it’s a red flag when UA stock has almost the same market capitalization as Adidas, but only has 9% of its cash.
In order to get Under Armour to its stated goal of being a predominantly international brand, it has to do more than sponsor “also ran” sports teams. UA is choosing to fight fire with fire by bringing a matchbox to a flamethrower.
Investors can do the math. Sporting apparel companies are taking on more risk for potentially more reward. That’s okay if the wallet matches the ego. But for a company that prided itself on its profitability and growth, Under Armour stock is in the middle of a leap of faith.
In 2014, international sales nearly doubled. In 2015, they increased by a substantially less margin of 57%. More than likely, each dollar will have to work harder and harder. This is especially true as once sleeping giants are now leery of the threat.
UA stock has had a tremendous run since its introduction in the markets. Smart sponsorship deals also helped Under Armour grab a larger pie of international sales. But with that comes fierce competition.
As an inevitable sponsorship bidding war launched, the sports market has gotten out of hand. That leaves no margin for error for UA stock, which is hell-bent on global dominance. And that entails going toe-to-toe with the big boys, causing worried investors to jump ship while they can.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
