Under Armour Inc (NYSE:UA, NYSE:UAA) stock has been halved in just four months. Two straight earnings reports have led to significant selloffs of both UA stock and UAA stock. The move to a triple-class system in April, and new ticker symbols announced in November, haven’t helped.
But the key problem remains a business that has disappointed the market so far over the past few quarters.
That said, the disappointment has come in part from expectations for Under Armour stock that were too high, rather than performance that was objectively poor. UA still grew revenue 22% in its fiscal 2016. Non-GAAP earnings per share rose nearly 10%, adjusting for the stock dividend earlier in the year.
Even in a fourth quarter whose results sent UAA stock down more than 20%, sales increased 12%, with international revenues up 55%.
As poorly as the stock has performed of late, though, this isn’t a broken company, nor is it an unprofitable one. That has led to speculation that Under Armour might become a takeover target.
That makes sense at some point … but not yet.
Why An Under Armour Takeover Is Unlikely Soon
“You know, I think a lot of people bet against Tom Brady the other night, too.”
That’s what Under Armour CEO Kevin Plank told CNBC soon after the company’s fourth-quarter earnings report. A reference to the Patriots’ historic comeback hardly sounds like a metaphor for a founder looking for the exits. Instead, it sounds as if Plank is intent on Under Armour making a similar comeback itself.
And the catch with Under Armour is that a decision to sell is Plank’s and Plank’s alone. His class B shares entitle him to 10 votes per share, meaning he has roughly 65% of voting power, according to the website. That voting power also makes the valuation gap between Class A shares (UA) and Class C shares (UAA) quite odd. Class A shares get one vote per share; Class C shares get none. But Class A shareholders as a group remain a minority, subject to Plank’s desires.)
There’s little reason to imagine Plank will sell Under Armour now, with shares down nearly two-thirds from all-time highs. The former college football player is intensely competitive, and like many founders, devout in his belief in himself and his company. He’s also just 44 years old — far from the age where he might be ready to cash in his chips and move on.
That said, there is a scenario where Under Armour may decide that selling out to or merger with a larger company makes some sense.
The brick-and-mortar retail landscape continues to change amid online competition. Under Armour customers ranging from Macy’s Inc (NYSE:M) to Finish Line Inc (NASDAQ:FINL) are closing stores aggressively. Both scale and e-commerce are more important than ever; and in both areas, Under Armour lags its ultimate rival, Nike Inc (NYSE:NKE).
Should Plank change his mind, there no doubt will be suitors for Under Armour.
Who Might Take Out UAA Stock?
Should Plank change his mind, there no doubt would be a number of interested companies. PVH Corp (NYSE:PVH) and VF Corp (NYSE:VFC) both own male-oriented brands. PVH has Calvin Klein and Tommy Hilfiger; VF owns North Face, Timberland, Lee and Wrangler, among many other brands. Under Armour would seem to tuck in nicely to both companies’ portfolios.
Another interesting tie-up — though it seems almost purely theoretical — would be a merger between UAA and Lululemon Athletica Inc. (NASDAQ:LULU).
Both companies have tried to move to opposite genders (women for Under Armour, men for Lululemon); the combination would quickly allow for cross-selling to existing customer bases. Lululemon’s physical footprint could allow more direct-to-consumer selling for Under Armour, negating its second-tier status to Nike at retailers like Finish Line and Foot Locker, Inc. (NYSE:FL). A LULU-UAA merger might seem silly, and redundant, even, but there are some interesting benefits to the tie-up — even if only in theory.
There is one company, however, that makes a significant amount of sense as a UAA buyer. That is Adidas AG (ADR) (OTCMKTS:ADDYY).
Adidas has effected an impressive turnaround of late, making it once again a legitimate rival to Nike. But it still lags Nike in key areas — most notably basketball, where Under Armour’s Curry line has given the smaller company considerable market share. A combined Adidas-Under Armour would give NKE a legitimate competitor for the first time in decades. At the least, it would all but ensure what essentially would be a worldwide duopoly in athletic apparel and footwear.
Adidas would have to pay up for Under Armour in that scenario; but given the ability to cut costs, and the potential for cross-selling and scale, Adidas very well might be willing to do so.
Again, this is a theoretical discussion for now. There’s literally zero evidence that Plank has anything in mind for Under Armour other than an aggressive attempt to rebound from recent disappointing results. And his opinion is the only one that matters, as far as UAA stock goes. The problem with buying Under Armour now, hoping for a takeover later, is that Plank might only change his mind when it’s too late, or at least close to it.
Still, investors with a long-term horizon should keep in mind that UAA does make some sense as a takeover target at some point. Investors with a shorter-term outlook, however, should be cautioned that such a takeover almost certainly won’t happen any time soon.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
