The Big Reason Under Armour Inc (UAA) Stock Isn’t Worth Keeping

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Momentum stocks are great … until the wheels fall off the bus. For athletic apparel maker Under Armour Inc (NYSE: UAA, NYSE: UA), the wheels fell off the bus in a dramatic way. No longer the darling of the athletes everywhere, Under Armour has imploded in a spectacular fashion. Shares of UAA stock have fallen by more than 50% over the last year. That caused Under Armour to hit a new three-year low.

The Big Reason Under Armour Inc (UAA) Stock Isn't Worth Keeping

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And things continue to get worse for the athletic firm. So far, UAA stock is down 34% just in 2017.

The real question is why? Truth be told, there are many issues with UAA, but there is one that should scare the heck out of anybody seriously looking at buying shares of the beaten-up athletic equipment and sportswear company. If anything, UAA could still offer plenty gains by playing the downside as the market continues to realize this.

UAA Is Just a T-Shirt Company

One of the reasons why Apple Inc. (NASDAQ:AAPL) has been successful is that the firm has managed to blend the worlds of tech and obtainable luxury goods together. Macs and iPhones can lack computing power, but make up for it in style. And their slightly higher price point adds a certain level of cachet to the brand. Under Armour wants to be Apple — a blend of higher-end and high-tech in the sports department.

It’s the reason why CEO Kevin Plank always hypes UAA’s focus on high-tech fabrics and designs. And at first, investors placed a high premium on Under Armour for this assumption.

But the reality of the situation is a little more down to earth. UAA is still just a T-shirt company.

Sales growth has slowed to a trickle at UAA because consumers don’t view Under Armour as a “high-tech, high-end brand” anymore. Its logoed products can now be found at places like Kohl’s Corporation (NYSE:KSS). That doesn’t give the impression of being “high-end.” Moreover, the illusion of “high-tech” is gone, as outlets like these aren’t exactly selling the best that the brand has to offer. My local Kohls’ biggest displays for Under Armour are plain cotton t-shirts and classic mesh workout/basketball shorts.

The issue here is that once a brand losses that cachet, it becomes commoditized and sales- thanks to lower price points- drop. Just look at UAA’s sales growth over the last few years. The firm managed to record a whopping 32% jump in sales for full-year 2014. The increase was only 28% in 2015 and 22% in 2016. This year, Under Armour only predicts an 11% gain in sales.

The second piece of commoditization of product is that you lose any sort of economic moat you have.

While serious athletes will continue to buy UAA branded HeatGear infused workout apparel, the average Joe hitting his Planet Fitness twice a week probably won’t. Literally every athletic brand at this point — including some very low-end ones — has some sort of compression/moisture wicking fabric shirt. Take a quick scan next time you go to the gym or your local YMCA. Competitors on this front will continue to chip away market share from UAA.

And it’s easy to say “Well, what about Nike Inc (NYSE:NKE) or Adidas AG (ADR) (OTCMKTS:ADDYY)? Shouldn’t the outcome be the same?” The answer is a big fat no. Yes, serious athletes will continue to use their products. But NKE and Adidas have also managed to blend the line between cool and athletic gear. Nike is just as much about style as it is about athletic performance. People go nuts for Nike’s limited shoes, and the firm had to create an app to provide a waitlist for its hottest new releases.

Nike and to some extent Adidas basically created the idea of athleisure wear. That entrenched position is going to be very hard for UAA to tap into.

UAA Still Trying Hard For Tech Dominance

Another example of how Under Armour is confusing is its forays into real tech. Over the last few years, UAA stock has launched or acquired several fitness apps, such MyFitnessPal, UA Record and MapMyFitness. It has also launched several branded fitness wearables.

Under Armour bulls will point to the potential growth that these devices and their interconnectivity/ability to upsell products will bring. However, here again, sales have been lackluster. These “connected Fitness” products only generated less than 2% of Under Armour’s sales last year.

Why? Like rival fitness band provider FitBit Inc (NYSE: FIT), UAA is finding out the hard way that fitness bands are quickly becoming a commoditized product. Everyone makes them, and most of the products are virtually similar in scope, design and offering. Nike has managed to get around the “commoditization” of fitness bands by keeping it “cool” and partnering with Apple.

The Truth Is Setting In for Under Armour

While UAA likes to pretend it’s a tech firm, the public and now investors are starting to realize that it’s just another shoe and sportswear manufacturer. That’s fine and doesn’t make it necessary a bad company. It’s just trading at a bad price.

Today, Under Amour stock can be had for a price-to-earnings ratio of 44. That puts it richly priced even for many tech stocks. When looking at it through the lens of another clothing stock, it’s insanely overpriced. I’ll give it some growth, but investors are simply paying too much for stock and its potential. NKE can be bought for half that amount and features roughly the same sort of growth projections and a growing dividend.

And investors are starting to realize just what UAA is. And as they continue to accept that fact, UAA stock has only further to fall as trades in-line with its peers. This is one where investors may want to stay away from until the dust settles.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

Aaron Levitt is an investment journalist living in Ohio. With nearly two decades of experience, his work appears in several high-profile publications in both print and on the web. Also likes a good Reuben sandwich. Follow his picks and pans on Twitter at @AaronLevitt.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/under-armour-inc-uaa-stock-keeping/.

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