Under Armour Inc (NYSE:UA, NYSE:UAA) stock has had a rough go of it lately. UAA stock has declined some 60% from 2015 highs. Back-to-back poor earnings reports have halved Under Armour stock just since late October, while the broad markets have rallied to all-time highs.
UAA stock bulls claim the issues for the company are related more to expectations ,which were too high, rather than performance, which hasn’t been that bad. After all, Q4 revenue increased 12%, and the company is guiding for 11% to 12% growth in 2017.
The problem with that argument is that Under Armour stock remains priced for growth, trading at almost 47x 2017 analyst consensus earnings-per-share estimates. And Under Armour growth has decelerated sharply, from 31% in 2015 to 22% in 2016 to the low double-digit guidance this year. Demand for UAA simply is declining, and I haven’t seen a good answer from the company on that front.
If anything, Under Armour’s demand problems may be growing, and that appears to be a branding issue. A company that made its name through innovation is facing competitive challenges from Nike Inc (NYSE:NKE) and adidas AG (ADR) (OTCMKTS:ADDYY).
Politically charged comments from CEO Kevin Plank led to a rebuke from UAA star Stephen Curry, and they appear to have hurt the company’s image. A pair of questionable recent distribution deals also raise questions about Under Armour’s target markets.
At this point, there are real concerns surrounding UAA’s business, as well as Under Armour stock. And I’m not convinced those problems can be fixed quickly.
Under Armour And Innovation
At the heart of the UAA stock growth story was innovation. The very name of the company hints at the work put in by CEO Plank to develop the company’s HeatGear technology. That product alone drove Under Armour growth, with professional athletes quickly adopting its apparel, and consumers following.
That innovation seems to have stalled out, however. UAA itself recently hired a chief innovation officer — perhaps a tacit admission of its recent struggles. Adidas — left for nearly dead just a few years ago — has resurrected itself, and Nike continues to invest heavily in R&D. The market that Under Armour in some sense created is now saturated. That leaves UAA unable to charge premium prices and drive premium profit margins.
UAA: New Distribution Channels
That’s why the two recent distribution deals seem so potentially troublesome for UAA stock. Last month, the company announced that its apparel would be available at all 1,200 Kohl’s Corporation (NYSE:KSS) department stores. With no offense to Kohl’s, it’s hardly the up-market, trendy, type of retailer targeted by traditional Under Armour customers. And the old-line department store retailer hardly seems likely to build up UAA’s brand image.
Even more surprising was the agreement announced Monday to sell Under Armour footwear at DSW Inc. (NYSE:DSW) stores. DSW tends toward the discount side of its industry, and it’s hardly performing well on its own. DSW stock trades near a 5-year low, and it’s coming off a year where same-store sales declined 3%, including 7% in its fiscal fourth quarter.
The broad concern for Under Armour stock is that neither partnership seems great for the company’s brand image. Nor does either sound like the kind of agreement made by a management team convinced in its company’s growth potential. And the problem for UAA stock is that growth potential remains priced in, even with the stock well off the highs.
UAA Stock Looks Risky
All told, there are just too many concerns surrounding Under Armour stock at the moment. There is an interesting arbitrage play between UA stock and UAA stock, but a long position seems too risky at this point. There’s essentially no chance of a buyout, as I argued last month.
The company itself expects profits to decline year-over-year in 2017. That means growth has to continue through the end of the decade, at least, just to support the current price. That’s not guaranteed.
Under Armour appears to be going downmarket from a branding perspective. The controversy surrounding Plank’s praise of Donald Trump — fair or not — adds to branding concerns. A poll run by one major hedge fund already has shown that UAA has lost the 18 to 25 crowd and the Kohl’s and DSW partnership may be an admission of that fact by management.
The fact is that apparel is a tough space. Trends tend not to last that long. Brands that are fashionable one year lose their luster the next. It might be too early to condemn Under Armour stock to the discount bin just yet. But it seems very likely that UAA’s brand isn’t as strong as it was just 18 months ago. And that could be a huge problem for Under Armour stock.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
