Under Armour Inc (NYSE:UAA) trades like the Tesla Inc (NASDAQ:TSLA) of athletic apparel and footwear — overvalued and on the brink of a fall.
In the early days, Under Armour had an incredible rise to prominence in the athletic apparel market. They positioned the brand as cool, sleek, and performance-driven, marketing heavily toward a younger demographic. This strategy worked well for a time, until UAA stock started going up against the big dogs of Nike Inc (NYSE:NKE) and Adidas AG (ADR) (OTCMKTS:ADDYY).
Heightened competition is not the only concern though. A pressured retail environment, Under Armour’s international expansion, and mass market distribution are all major headwinds that the Company faces. And I’m not convinced UAA stock is going to be able to weather these headwinds without enduring some damage, mostly in the form of market share loss, and multiple contraction.
Under Armour currently trades at sky-high valuations for a retailer, 56x. Compare that to Nike, the standard bearer in terms of brand strength and new product innovation, which trades at 23x. Under Armour is ready for a tumble.
UAA’s Brand in Peril
Under Armour has decided to broaden its distribution by entering mass retail outlets, such as Kohl’s Corporation (NYSE:KSS) in order to prop up sales.
But is this the right strategy or does it confuse the brand message? Kohl’s is popular with middle-class women, whereas Under Armour’s market is youths interested in a cool, sleek shoe. Kohl’s is known to engage in deep discounting as well. It would undermine the premium status positioning that UAA has strived for, if branded items do go on sale the way of most Kohl’s merchandise.
The competitive advantage in this game is branding. The risk of becoming yet another athletic apparel and shoe brand is a huge concern. This feels a bit like a desperate move to jump sales growth, but the negative longer-term effects could cost UAA far more.
Worse yet, it seems like the company has already lost a good deal of popularity over the past several years. Male teens have stopped adding Under Armour to their wardrobe, as reported by a Piper Jaffray survey about teen spending. Under Armour doesn’t even make it into the top 10 favorite apparel or footwear brands! Guess what? Nike came in at number one in both categories.
And the competition is coming from other directions as well. Enter Amazon.com, Inc. (NASDAQ:AMZN).
As UAA shifts to compete in athleisure apparel, they meet a wall of existing competition. Lululemon Athletica Inc. (NASDAQ:LULU), of course, in addition to a host of niche brands, some with celebrity sponsorship.
Never one to lose an opportunity to enter a high growth industry, AMZN announced early this year its intent to enter this market as well. This creates mounting pressure on UAA stock, as competition intensifies.
Global Expansion Ill-Advised
After reporting a loss in Q1, Under Armour is trying to turn around the ship. CEO, Kevin Plank managed to say without a hint of irony, “Our first-quarter results were in line with our expectations and we’re off to a solid start in 2017.” This is not a tech startup with continual losses. This is UAA’s first quarterly loss as a publicly traded company. For that to be “in line with our expectations” should make an investor’s stomach churn.
Management appears to be pursuing international expansion as one strategy to boost growth and profits. International markets were only 15% of net revenues last year. This is a losing battle as Nike and Adidas have deeper pockets to maintain their dominance abroad. They already have a sizable lead in brand recognition, and the concern is that UAA throws good money after bad in chasing an elusive spot internationally.
Management’s focus should be in their core market in North America, a higher margin segment.
Conclusion
The risk-reward favors a short position in UAA stock here.
Under Armour is simply not the Under Armour that people used to know and love. They managed to sign Steph Curry, but sales continue their descent. The Kohl’s distribution strategy seems to be a botched effort and international expansion is ill advised given the downturn in the core market and entrenched market positions by competitors.
The consequences of poor decision making will likely lead to multiple contraction sooner rather than later as the market reckons with mounting losses. Attempts to grow the top line have not be sustainable and UAA stock will suffer.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
