Under Armour Inc (NYSE:UAA, NYSE:UA) found itself in the middle of a controversy last week involving President Donald Trump. While many companies find themselves on the defensive when Donald Trump tweets or calls them out publicly, it was actually Under Armour’s own comments that found the company being boycotted and questioned by their own endorsed athletes. Several apologies have come from UAA, but the damage may be too great to overcome.
February should have been a good month for Under Armour. After all, the apparel company found itself some free advertising and publicity via Super Bowl LI — Super Bowl MVP winner Tom Brady is an Under Armour endorsee.
Under Armour also found themselves in a Super Bowl commercial featuring Cam Newton for Buick, without needing to shell out the $5 million cost for the ad. Instead, Under Armour was found calling several of its other endorsed stars to apologize and play clean-up.
How UAA Stock Got in Hot Water
UAA founder Kevin Plank found himself on a business committee with President Donald Trump. The committee, which also included executives from Corning Incorporated (NYSE:GLW), Dell, Dow Chemical Co (NYSE:DOW), Ford Motor Company (NYSE:F), Johnson & Johnson (NYSE:JNJ), Lockheed Martin Corporation (NYSE:LMT) and Tesla Inc (NASDAQ:TSLA) discussed business and manufacturing with the recently sworn in president.
It was that relationship that led Plank to imply support for Trump while appearing on CNBC’s “Fast Money Halftime Report.” Plank said, “such a pro-business president is something that’s a real asset to this country.”
One of the best things for Under Armour has been its relationship with NBA superstar Stephen Curry. Under Armour signed Curry at an early mark and has been able to keep him signed despite advances from rival Nike Inc (NYSE:NKE). Curry was perhaps the most upset about this comment from Plank. When asked about it, Curry said, “I agree with that description, if you remove the et from asset.”
Other endorsees The Rock and Misty Copeland also spoke out against Plank’s comments. Curry retweeted a post from The Rock that said he was committed to the people and that a company didn’t define him.
Losing Curry would have been a huge blow for UAA stock and luckily it appears that it did not come to that. Curry is signed with Under Armour through 2024, which is also good news, since this could be the sign of the NBA superstar looking elsewhere due to personal beliefs. Curry said in an interview, “no amount of money, there is no platform I wouldn’t up off if it wasn’t in line with who I am.”
Behind Stephen Curry, Under Armour saw its shoe sales hit $1 billion for the first time in the last fiscal year.
What followed after Curry and other endorsees spoke out was panic mode by Under Armour. A full-page ad was taken out in the local newspaper, the company released a statement and finally Plank clarified his comments. Under Armour reminded investors and customers that they “engage in policy, not politics.” Under Armour also said “diversity is our strength.” Plank’s open letter opposed the travel ban Trump had put in place and stated “immigration is a source of strength.”
Under Armour Going Forward
Plank has a fine line to walk when it comes to discussing Donald Trump. After all the Under Armour leader could see his company on the bad side of Trump’s policies. The majority of Under Armour products are manufactured in China, Jordan, Vietnam and Indonesia.
UAA stock has begun to start production in the United States recently, but could face increased costs if Trump has his way on imported goods. Now, backtracking and going against Trump’s actions may cause more pain for Plank and his company.
Rival Nike took a stand on Donald Trump early and also used Under Armour’s struggle as another opportunity to take the company head on. An ad which debuted during the Grammy Awards showed athletes while producing dialogue like “here you’re defined by your actions, not your looks or beliefs. Equality should have no boundaries.” The ad, which featured Lebron James, Serena Williams, Kevin Durant and Gabby Douglas, showed Nike’s continued support for diversity and Nike was one of the first companies to publicly speak out against Donald Trump’s immigration ban.
The impact of Kevin Plank’s comments and the fallout could end up being minimal in the short term, but likely alienated some customers enough to switch or turn away. For a company trying to grow its women’s segment and basketball shoes, appearing to take sides with a president who has been protested by women and minorities probably wasn’t a great move.
For Under Armour investors, there is a more pressing issue here. The company posted one of its weakest quarters in January when it announced its fourth-quarter and full-year earnings report. The company saw revenue growth of 12% to $1.3 billion for the fourth quarter. The increase was led by footwear, which saw gains of 36% to $228 million. Apparel and accessories both saw gains of 7% in the quarter. While 12% revenue growth is nothing to sneeze at, this actually ended a huge streak for Under Armour and may signal that its run as the great growth stock it was is over.
For 26 straight quarters, UAA posted revenue growth of 20% or more. That impressive streak ended with the fourth quarter. For the fiscal year, revenue increased 22%. Revenue was higher by more than 20% in each of the first three quarters, meaning the fourth quarter was a fluke or the company is starting to struggle.
It would appear that the struggle is just getting started after looking at guidance. Under Armour is forecasting revenue to increase in a range of only 11% to 12% for the next fiscal year.
Under Armour stock is up more than 70% over the last five years. UAA stock did see a rough year in 2015, with shares down 34%. In 2016, shares declined another 39%. UAA stock is not faring any better in 2017, with shares sharply down after the latest earnings report. While some will call this fall in Under Armour a buying opportunity, I am not overly convinced. This is a stock that traded at a premium valuation for years thanks to its impressive growth record. As the growth has faded, new headwinds have entered.
Until Under Armour can string together a couple consecutive strong quarters, I would stay away.
As of this writing, Chris Katje did not hold a position in any of the aforementioned securities.