Since engineering a stock split meant to keep CEO Kevin Plank in control of the company, Under Armour Inc (NYSE:UAA, NYSE:UA) shares have lost nearly 30% of their value. This happened despite the kind of good news that would send most stocks to the stratosphere: The quarter ending in September saw real growth in both sales and margins for Under Armour stock.
The brand signed a 10-year deal to put its logo on Major League Baseball. UAA even had its first real fashion show, with Belgian designer Tim Coppens showing a new line call UAS — Under Armour Sportswear.
Yet Under Armour stock sold off on those quarterly results. It sold off again after the baseball deal was announced. Investors have ignored the new fashion line and they still treat the company as a sportswear maker.
The company’s own forecast for the fourth quarter and the next two years is modest, and the shorts have celebrated.
The question for 2017 is, can UAA stock come back?
The Bear Case for Under Armour Stock
CEO Plank made some of the bear case during UAA’s October conference call, saying growth now requires “significant investment” and “it is time to invest.” Traders heard that as hinting at a margin squeeze.
Bears also say the company is putting money into clothes that really must go into its channel. The demise of Sports Authority and the consolidation of sports retailing continue to impact margins. Supplier stocks are being killed while the remaining retailers, notably Dicks Sporting Goods Inc (NYSE:DKS), are up. Dick’s now sells at a premium to sales, which is very unusual for a retailer.
UAA is slowly rolling out its own branded stores, copying rivals Nike Inc (NYSE:NKE) and Lululemon Athletica Inc. (NASDAQ:LULU), but its direct channel is not yet material to results.
Fixing a channel is a lot more expensive, and more difficult, than creating a fashion line.
The Bull Case for Under Armour Stock
I find the bull case more compelling.
The new sportswear line offers Under Armour the chance to get into a lot of retail outlets that previously ignored it, and to refresh the athleisure category as mainstream daywear. UAA’s first success here has already been booked, a deal with Kohl’s Corporation (NYSE:KSS). Under Armour stock is doing more than its main rival to get out of the sports apparel swamp.
UAA is wisely putting its technology acquisitions, like MapMyRun, directly into its products, starting with shoes. Integrating technology directly into clothing appeals to young pseudo-athletes who have always been at the heart of its target market.
Some of Under Armour stock’s problems are a hangover from its split. The confusion was only fixed recently when its new Class C shares, which don’t have voting rights, were given the stock symbol UA, while the more-active Class A shares were changed to UAA. The symbol refresh may be a solid opportunity for Under Armour stock owners.
Bottom Line on UAA Stock
If you believe the economy will grow in 2017, I think UAA should be on your buy list.
Most of the company’s problems over the last year were pre-emptive reactions to market change. Plank is the company and he can’t really be questioned. Going beyond sportswear is essential to growth, but it requires investment. The whole category is facing a channel crisis.
The point is that Under Armour stock made the right moves in 2016; and assuming Plank has not lost his touch, those moves should start to pay off in 2017. It always makes sense to bet the jockey rather than the horse, and Plank is a proven jockey. It may take time for a bet to see a return, but if you have a three-to-five-year time horizon the current weakness is a good spot to get in on UAA.
Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
