At a certain point, every investor must acknowledge that a position has gone awry. Such recognition leads to the more important step of mitigating further damage. For Under Armour Inc (NYSE:UAA), I don’t think I could have warned my readers any more than I have. I had reservations about UAA stock when I first started covering it. Today, I have zero doubts Under Armour will cause more pain.
UAA had the best chance of reestablishing credibility in its second-quarter earnings report.
Wall Street wasn’t just looking for a beat against top-line and bottom-line expectations. They wanted an affirmation that the sport goods and apparel maker sparked a fresh vision in an ugly market. Instead, investors received the opposite message. Under Armour pared losses on earnings, and beat on revenues, but its forward guidance was awful.
As InvestorPlace contributor Dana Blankenhorn points out, UAA stock is a troubled investment. The company announced a restructuring of its business, and a 9% workforce reduction. Reading between the lines (as Blankenhorn did), you can tell easily that Under Armour isn’t bringing its A-game. More worrisome for current shareholders, UAA is running out of ideas.
I’ve argued this before, but the sports endorsement market is absolutely insane. Whether it’s a star athlete or a team endorsement, only the biggest and the best can afford such “investments.” Thanks to their massive footprint, adidas AG (ADR) (OTCMKTS:ADDYY) and Nike Inc (NYSE:NKE) can get away with mega deals. But even then, the majors demonstrated restraint in certain cases.
What’s undeniable is that Under Armour can’t throw cash around like it can afford to lose it, because it can’t.
Under Armour Made Too Many Aggressive Bets
In recent years, Under Armour has been very acquisitive in its sports endorsement pursuits. Many of the famous athletes you love (or hate) display their nifty UAA logos as they prance around in commercials. But as Lori Shaw, director at sports insurance broker Aon plc (NYSE:AON) once stated, a superstar athlete “can have a significant impact on a corporation’s balance sheet, depending on how much revenue is tied to a specific celebrity.”
For UAA stock, management’s aggressive moves resulted in only temporary benefits. Unfortunately, the costs of those questionable endeavors are starting to haunt Under Armour. For example, over the past four years, long-term debt jumped from $48 million to $790 million. Meanwhile, its cash and equivalents fell from a robust $347 million to a now worrisome $166 million.
What did the sports-apparel maker get for its 1,546% increase in debt? Goodwill soared to a 375% gain to $580 million. Intangible assets increased to $640 million from $146 million in 2013. Taken into context, UAA has more than 31% of its total assets tied up with intangibles. Four years ago, the allocation was much more reasonable at less than 17%.
To put it bluntly, none of the major, publicly traded sports brands are levered so much to intangible assets. Inclusive of all assets that are not related to property, plant or equipment, Nike has 14.4% intangible exposure. Adidas is quite high at 26.5%, but still notably lower than Under Armour.
UAA Stock Is in Panic Mode
The upstart company took huge risks in sports endorsements to kick its brand to high gear. Today, UAA executives may be kicking themselves. In four year’s time, annual revenue increased by a 114% margin. That’s a wildly amazing growth spurt, until you consider the cost. I believe Under Armour mortgaged its future to get a jump start on the industry giants.
One look at UAA stock and you can see that this bet did not pay off. From its highs of September 2015, shares are almost 70% lower today. Even worse, the majority of these losses occurred inside of the trailing, one-year period.
As I mentioned at the start of the story, I don’t think we’re done falling with UAA stock. Clearly, most everyone associated with the equity are panicking out. This is no longer about trading; rather, it’s about getting out at the best price possible. I would not be at all surprised to see shares hemorrhage into $12 territory.
Personally speaking, I believe several Under Armour proponents conflated the UAA stock with the corporate brand. By now, I have been told numerous times that UAA apparel is the Millennial’s choice for sports apparel. Whatever. Until management can parlay that enthusiasm into a coherent, cohesive business, I’d avoid it.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
