How does the old saying go? If you live by the sword, you die by the sword? It’s not a cliche you often hear applied within the world of equities, but that doesn’t mean it can’t apply. Just ask owners of Under Armour Inc (NYSE:UAA), who have watched UAA stock slide more than 60% lower over the course of the past 12 months as years of overspending (on the wrong things) and a lack of cultivation of the right things has finally turned into trouble.
Some of the analytical rhetoric is bullish, mind you. Case in point: Cowen analyst John Kernan recently opined that the wave of doubt surrounding Under Armour has been so brutal of late that the market has more than priced in the worst-case scenario for the sports apparel name.
In other words, UAA stock may have been beaten down so badly that it has become a contrarian trade.
Sometimes though, one man’s junk isn’t another man’s treasure. Sometimes, one man’s junk is everyone else’s junk too.
Finally Paying the Price
Just for the record, here’s Kernan’s exact view of Under Armour stock as of Tuesday:
“Discounting and price cuts across key items in footwear and apparel, including Curry 3, are concerning but management did guide to 100bps of Q1 gross margin pressure. Fundamental turn not in sight, but UAA already has sector-high sell ratings and highest short interest in the S&P 500. We see low probability ’17 guidance is revised on weak 1H:17.”
Fair enough. But it’s difficult to make a bullish argument from a mere ‘not completely bearish’ case, particularly when the underlying company has nothing compelling to tout.
Blame Nike Inc (NYSE:NKE) for a large part of the headwind, by the way, though props to Adidas AG (ADR) (OTCMKTS:ADDYY) as well. The two companies have been leveraging their size and reach, and while Under Armour has made headway over the years, the two bigger players have recently drawn a line in sand.
Under Armour is entering what was an inevitable price war that it was never equipped to win. Even though Nike missed last quarter’s estimates, the top and bottom line were both well up on a year-over-year basis. Not so for Under Armour with its most recent quarterly results.
The disparity is just a microcosm of a shifting intra-industry dynamic that doesn’t play into Under Armour’s hand. Nike can afford to go toe-to-toe with Under Armour. UAA can’t say the same about its opposition.
Under Armour Got Sloppy
In the bigger picture, though, Under Armour is finally paying the price for years of reliance on spending massive amounts of money on celebrity endorsements.
It’s paid off, sort of, in that sales have grown tremendously. There’s a downside to the constant use of such a strategy, though … learning to be too reliant on costly star-power, and forgetting how to think and act like a guerrilla marketer and getting lots of bang for your promotional buck. Though the company doesn’t disclose the details of its endorsement deals, leaks and estimates of its past agreements suggest its contracts can reach deep into nine-figure territory.
That may be a big part of the reason net margins have been alarmingly thin since … forever, and why the bottom line isn’t getting any bigger even though the top line has more than doubled since 2013.
Still, nothing lasts forever, does it?
Nothing may last forever, but FBR Capital is the latest of analytical outfits that doesn’t think Under Armour is positioned for a turnaround just yet. The firm downgraded UAA stock this week to “Underperform,” and lowered its price target on Under Armour stock to $14. That’s 27% less than the stock’s current price.
Analyst Susan Anderson explained:
“Our checks show a price war is intensifying between [Nike] and [Under Armour] after UA’s entrance into [Kohl’s], which is causing [Nike] to defend its turf…. Also, a lack of UA footwear innovation, increased competitor innovation–Nike VaporMax–and out footwear survey showing UA is losing consumer resonance could mean lower 2017 footwear growth.”
There’s that nagging price-war reality-check again, underscored by the fact that Under Armour is following the lead set by Nike and Adidas rather than developing its own defining goods.
Bottom Line for UAA Stock
No, Under Armour isn’t completely dead in the water, and UAA stock isn’t destined to tumble to zero. Indeed, the timing of this wake-up call was fortuitous. Were the company to continue focusing on high-priced endorsements and costly licensing deals, it may well have dug its way deep into a hole it couldn’t get out of. At least now there’s a plausible glimmer of near-term hope.
Still, Under Armour has a lot of rethinking to do about the way it does business. Nike, a sleeping giant, just woke up.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
