Under Armour Inc’s (NYSE:UA, NYSE:UAA) high-flying CEO, Kevin Plank didn’t just hit a wall in the company’s latest quarter. He crashed into at about 120 miles per hour, damaging his credibility with Wall Street to such an extent that it will be difficult for him to recover.
To be sure, Plank deserves a lot of credit for defying the naysayers as he outflanked larger established rivals, such as Nike Inc (NYSE:NKE) and Adidas AG (ADR) (OTCMKTS:ADDYY), in the highly competitive market for athletic apparel and footwear. Signs are emerging, though, that he may be in over his head.
Under Plank’s leadership, the Baltimore-based company has spent nearly $1 billion on diet and activity-tracking apps in recent years and has precious little to show for it.
Connected Fitness revenue was only $80 million in its latest quarter. Then again, pure plays like Fitbit Inc (NYSE:FIT) aren’t doing that great either and Nike dropped its Fuelband tracker in 2014 after it failed to catch on. He also is reeling from the end of the “athleisure” trend and increased competition from new entrants into the market.
Such strategic blunders would have cost most CEOs their job. Plank, though, can enjoy some job security since he owns about 30 million shares of Under Armour’s B shares and is the company’s biggest holder.
This presents a challenge for UA shareholders to oust him, though it isn’t an insurmountable one. Indeed, Wall Street is chock full of examples of company founders who were pushed out the door including Groupon Inc’s (NASDAQ: GRPN) Andrew Mason, Mike Lazaridis at BlackBerry Ltd (NASDAQ:BBRY) and Yahoo! Inc.’s (NASDAQ:YHOO) Jerry Yang.
Even more worrisome was the abrupt departure of CFO Chip Molloy after less than one year. Anytime a finance chief leaves under such circumstances, that’s a worrisome sign for investors and indicates that owning UA stock is too risky for most investors.
This is a change in fortunes for UA.
Wall Street loves a plucky upstart, particularly one like Under Armour that grew at double-digit rates. Once there is even the tiniest hint that a highflier is running out of gas, however, investors run for the exits and don’t look back because recapturing lost growth is almost impossible. Just ask Apple Inc. (NASDAQ: AAPL) CEO Tim Cook and a billion other former highfliers that are too numerous to mention.
The bell tolled for UA in the fourth quarter. Profit was little changed, which included the important December holidays, at $104.9 million, or 23 cents per share. Revenue rose 12% to $1.31 billion, breaking a streak of 20 straight quarters of 20% growth or higher. Even more worrisome was the drop in gross margins from 48% to 44.8%, indicating that much of its sales were being done at deep discounts.
UA stock is radioactive in the minds of many investors. Shares have plunged nearly 30% since the start of the year, and will continue to plummet. Analysts are slashing their ratings as fast as they can, figuring the growth story was coming to an end. S&P even knocked its rating on UA’s sole bond issue to “junk” status. Short interest in UA stock is a whopping 8.5%
In the next few months, Plank will either decide on his own that he isn’t the right person to lead the company or have that decision made for him. Though it may be tempting to buy UA stock on its recent dip, I would hold off until signs emerge that Plank has come to his senses and realizes that he needs help. Given that he compares himself to his client New England Patriots quarterback Tom Brady, the best ever to play his position, that may take a while to happen if it ever does.
As of this writing, Jonathan Berr did not hold a position in the any of the aforementioned stocks.
