Under Armour Inc (NYSE:UAA, NYSE:UA) remains a strong brand that is backed by some of the biggest names in sports, including Tom Brady, Steph Curry, Jordan Spieth and many more.
Yet, a disconnect exists between the Under Armour brand and UAA stock, as the company’s fourth-quarter report made it clear that investors had expected too much. Management, too, was equally guilty of inflated expectations.
Long-term investors are certainly feeling the pain as Under Armour stock trades near multi-year lows while the markets trade at all-time highs. Better days are ahead, though, and I have three convincing arguments as to why.
UAA Stock Catalyst: Expectations Are Reset
Now that the damage to UAA stock has been done, step one of the rebound is to exceed the now-lowered expectations. Let’s take a look at what the Street is modeling in the near-term. According to data compiled by Yahoo! Finance, Wall Street analysts expect Under Armour’s Q1 revenue to be $1.11 billion, which represents roughly a 6% year-over-year growth, but a sequential decline from $1.3 billion in the most recently announced quarter.
Is this achievable? Based on recent history, the answer is a clear yes. In Q4, Under Armour’s year-over-year revenue rose 12%, Q3 it rose 22%, Q2 it rose 28% and in the first quarter, it rose 30%.
So 6% year-over-year growth is well below the company’s historical trend. The easy setup heading into the first-quarter earnings report could represent the first major catalyst that could jolt shares back higher.
Baby steps are key here to reestablishing faith in the company.
UAA Stock Catalyst: Lapsing of a Major Headwind
Under Armour is still feeling the pain from Sports Authority’s bankruptcy. Matt Powell, a sports industry analyst at The NPD Group, told Forbes that SA’s bankruptcy could still haunt UA through Q1, “but after that the drag should be over and trend should return to normal.”
What Powell left out is that Under Armour’s products are now sold in Kohl’s Corporation (NYSE:KSS) stores, which presents the company with a new distribution expansion opportunity. This also represents a catalyst which peers like Nike Inc (NYSE:NKE) realized years, if not decades, ago. If Under Armour achieves success in Kohl’s stores, it could prompt the company to expand into other retail chains. The company’s Armoury shop-in-shop concept at Champs also serves as a sign of its dedication toward promoting its brand in the mall.
Here’s a crazy thought — maybe Under Armour can occupy a presence outside of its core sporting goods channel and build up a strong presence at stores like Famous Footwear, which is owned by Caleres Inc (NYSE:CAL). After all, it does sell a compelling set of basketball shoes backed by one of the hottest NBA stars — Steph Curry.
UAA Stock Catalyst: New CFO to the Rescue?
Under Armour’s sales growth has been accompanied with a similar growth in SG&A spend. But since sales are no longer growing at the same pace as previously expected, management would be wise to cut back on spending initiatives (without compromising on the necessary investments to support the brand, such as product innovation and supply chain.)
This can be done. For starters, no more acquisitions. No more spending hundreds of millions of dollars for fitness apps — the category is a nightmare — just look at Fitbit Inc (NYSE:FIT) — so it can cut back here. Also, management can focus on promoting and supporting existing stores without opening new ones and also scale back on marketing expenses.
Ironically enough, Under Armour is still searching for a new CFO. So naturally, the announcement of a new executive whose first order of business is cutting spending would be met with cheers.
Bottom Line on Under Armour Inc
Adidas AG (ADR) (OTCMKTS:ADDYY) has proven that a down-and-out athletic brand can make a comeback. The global athletic wear market is valued at around $300 billion, which means it is certainly large enough for Under Armour to continue growing and, bit by bit, steal share from the big boys.
No one is saying that Under Armour is the next Nike, but it has proven itself very capable of growing over time. Now that expectations have been completely reset, it is reasonable to believe that UAA can, at the very least, beat the low bar and send UAA stock soaring.
As of this writing, Jayson Derrick did not hold a position in any of the aforementioned securities.
