Based on nothing more than the top line’s trajectory, Under Armour Inc (NYSE:UA, NYSE:UAA) stock should be soaring. Spurred by some pretty amazing athlete endorsements, sales have grown by double digits for years now, and are expected to do the same for the foreseeable future.
Yet, there it is … UAA stock is down more than 40% since the middle of 2015, and still knocking on the door of lower lows.
It’s that pesky bottom line. It’s never been great in terms of margin percentages, and it’s not getting bigger nearly as fast as it should be compared to the pace the top line is growing.
Given the size and scope of the sponsorship deals CEO Kevin Plank has committed the company to for the next several years, investors are wondering if Under Armour stock will ever muster any meaningful, profit-driven upside.
Athlete Endorsements Are Expensive
Most consumers may not recall it because the brand was still a relatively minor one through 2010 or so — when it signed highly decorated Olympian Michael Phelps on as an endorser — but even before UA stock IPO’d in 2005 the company was tapping into the power of celebrities. The pivot point, though, was in 2010: 2011’s revenue was up 36% versus 2010’s, and that pace of red-hot sales growth has been sustained ever since.
It really wasn’t until 2012, though, that the company and UA stock holders fully digested the notion than celebrity athletes weren’t just a tool to get Under Armour over the size/scale hump. This was the new normal, for better or worse. It was an article penned by Plank for the May-2012 edition of the Harvard Business Review that really painted endorsements and sponsorships as the new norm.
The contribution title was, in retrospect, more subtly telling than anyone suspected at the time: “Under Armour’s Founder on Learning to Leverage Celebrity Endorsements“. Plank went on to explain, “What began as a word-of-mouth brand-building strategy has evolved into a multimillion-dollar expense item. But it’s a lot of fun.”
Fun? While it’s been fun for Plank and his stable of star athletes, and was fun even for investors for a while, it ceased to remain fun as of the middle of 2015. Now it’s just that nagging multibillion-dollar expense Plank largely brushed off five years ago.
It begs one question: Is the company able to sustain sales growth without even-bigger spending growth on endorsements? It doesn’t look like it.
Seriously, They’re Very Expensive
Most of the details behind the earlier sponsorship deals were never disclosed; the latter ones have been more transparent. Among the more recent and sizable (though undisclosed) ones were golfer Jordan Spieth’s 10-year deal worth an estimated $200 million, and NBA star Stephen Curry’s likely nine-figure offer.
While the details of Curry’s contract are unknown, we do know that Under Armour was willing to offer fellow basketballer Kevin Durant a ten-year deal worth at least $265 million. And, we do know that Plank has already inked a deal with UCLA to become a sponsor, with all the marketing and advertising privileges thereof. That ten-year agreement cost UA stock owners $280 million.
For perspective, Under Armour has generated $4.69 billion worth of revenue for the past four reported quarters, and only turned $200.3 million of that into net income.
Those endorsements are proving to be very costly indeed, and it’s not clear the company can break the habit.
A picture of the company’s changing expense structure over the course of the past several years speaks volumes. The endorsements are part of the cost of revenue, though advertising is part of selling, general and administrative expenses; it’s conceivable that the endorsement deal expenses take a toll on both, depending on the nature of the expense.
Click to Enlarge In short, Under Armour isn’t enjoying the benefits of scaling up, which are wider margins and relatively lower expenses. And, it’s not clear if it ever will… or even can, now that the company’s public persona is one associated with high-profile athletes and teams.
So what’s the endgame? It’s a question any owners of UA stock should be asking. And, they are. They have been since the middle of 2015, and not yet getting an answer they like, they’ve been beating the stock down.
Until Plank can provide a viable answer — or better still, wean the company from such reliance on flashy but costly deals — UA shares are poised to struggle.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.