Lululemon Athletica (LULU) jumped 3.6% on Thursday, in part because of renewed rumors that Under Armour (UA) might be willing to fork out billions to acquire LULU in an attempt to compete with Nike (NKE).
The move wouldn’t be a shock, but in looking at the impact to UA stock, it would be a horrible deal.
Instead, Under Armour should continue to pursue one thing.
LULU Does Nothing Good for UA Stock
The bottom line is that LULU can’t give UA anything that Under Armour couldn’t get itself. Lululemon is known for yoga pants and other athletic apparel for women. However, UA has made a huge push into women’s apparel over the last year.
According to UA management, its women’s business will generate approximately $1 billion in annual revenue by the end of next year. That would represent about 20% of the $4.9 billion in revenue than analysts expect UA to earn. On top of this, UA management said earlier this year that women’s apparel will one day match or exceed men’s sales.
While UA isn’t exactly known for its yoga pants, the company does specialize in athletic wear that includes pants, which is one reason its women’s apparel business has grown so quickly.
With that said, UA is a valuable company with a $20 billion market capitalization, but so is Lululemon at $7 billion. Under Armour already has $900 million in debt on its balance sheet, and to acquire LULU it would be adding a lot more, and most importantly, it would not be getting much in return.
Under Armour Needs to Focus on Stephen Curry
All things considered, if UA is thinking about LULU, it should forget it! Instead, UA needs to focus on the one area that could accelerate revenue growth, increase margins and drive an overpriced UA stock even higher. That thing is footwear, and more specifically, Stephen Curry.
Curry has been the ultimate jackpot for those willing to take a bet. He was barely recruited out of high school, but Davidson took a chance on him and it earned the school its best-ever run in the NCAA Tournament. Then, in 2009 there were six teams that passed on him before Golden State picked Curry with the seventh pick. And last year, Curry was the NBA’s MVP and also brought an NBA Championship to his city.
The most recent string of events to surround Curry is the debate of whether he is the best basketball player in the world right now. Curry is largely considered the best shooter ever, but LeBron James has owned the title of “best” for many years.
Earlier this month, Business Insider wrote a compelling piece that celebrated Curry as the best NBA basketball player, and NBA analyst Stephen A Smith recently said on First Take that Curry is best in the league, saying that Curry can do things that LeBron can’t.
What does all this have to do with UA? The answer is that UA took a chance on Curry, making him the face of their footwear campaign for basketball several years ago. UA got ahold of Curry very early, and the effect was footwear revenue that soared 61% to $196 million during Q3.
While significant, Under Armour is still irrelevant in the footwear space, an industry that Nike essentially owns, especially in basketball. According to NPD’s data from the first quarter, Nike’s Jordan and Nike brands control 62% of the U.S. footwear market, and almost all in basketball. Further, Nike creates three-quarters of its earnings before interest and taxes in North America, also mainly from footwear. In total, Nike created over $5.1 billion in revenue from footwear alone.
Therefore, UA is a long ways off from threatening Nike in footwear, but if UA stands a chance, it must be in basketball, where NKE creates the majority of its footwear revenue.
Keep in mind, NKE built much of its footwear empire behind the Jordan brand, an amazing feat given how long Michael Jordan has been retired. However, the success of Jordan shoes illustrate what a key endorser can do, something that Curry might very well be able to mimic if he can maintain his current trajectory.
While I am not suggesting that Curry will be Jordan, I do think there is great potential in his brand given that his best years should still be ahead of him.
Furthermore, with less than $200 million in last-quarter footwear sales, the bar is still very low for UA to significantly grow its footwear business.
As a result, UA should not waste its money or resources to acquire assets it could nearly replicate in LULU, but rather should invest those resources into marketing for Curry and footwear.
At the end of the day, Curry has the potential to drive UA sales and margins, and also UA stock, much higher long-term.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities