Athletic apparel maker Under Armour Inc (NYSE:UAA) has had a tough year so far. UAA stock is down 30%, and coverage of the company has been overwhelmingly negative. At this point, you have to ask yourself if investors are overreacting to negative press, or if the company really deserves the beating it’s been getting.
Unfortunately for UAA, I think the 30% slide has been earned and I wouldn’t be surprised if more downside is on its way.
It’s not that Under Armour is heading to zero, though. In fact, I think the company actually has a lot of potential. However, UAA’s future growth plans are confusing and do very little to inspire confidence in UAA stock’s potential. Not only that, but UAA is operating in a challenging industry that is facing a lot of headwinds, so the company can’t afford to coast on a flimsy growth strategy.
An Uninspiring Strategic Plan
There is a lot to like about UAA’s future plans, namely the company’s investment in digital. Under Armour has spent billions developing a health and fitness platform that will draw people into its ecosystem. I believe that UAA’s digital goals are exciting ones, but for me things turn sour when I look at some of management’s other strategic initiatives.
CEO Kevin Plank has said that he will build “the greatest retail store in the world” and even set an opening deadline of 2019. Yes, he was being literal — Under Armour is actually planning to open a brick-and-mortar store. This is surprising, considering that most retailers are cutting down on physical store footprints because consumers have become less interested in shopping in person.
Don’t get me wrong, there’s definitely something to be said for creating a “shopping experience,” which is pretty much the only way to run a successful brick-and-mortar store these days. But, those kinds of businesses are few and far between, and the chances of UAA getting it right are slim.
Then there’s the partnership with Kohl’s Corporation (NYSE:KSS). One of the things UAA relies on heavily is its image as a premier sports brand that focuses on athletic performance. However, the Kohl’s partnership offers a mid-tier option that takes away from the high-end image Under Armour is trying to maintain.
The Amazon Effect
One of the reasons it’s difficult to digest Under Armour’s wishy-washy strategic plan is that the company is operating in a challenging space with very little room for error. We’ve seen big name distributors like Sports Authority go out of business due to the rise of e-commerce, a pattern that has hurt athletic companies like UAA. Hibbett Sports, Inc. (NASDAQ:HIBB), which is responsible for more than 16% of UAA’s total sales, is expecting comps to decline by 10% in the second quarter, a worrying trend for UAA stock investors.
Store closures are probably a big reason that UAA competitor Nike Inc (NYSE:NKE) decided to offer its products on Amazon.com Inc. (NASDAQ:AMZN). Now, there’s a lot of pressure on Under Armour to explain whether NKE’s move will impact its strategy and whether UAA will ever follow suit.
Style Slide
Not only is UAA suffering from an oppressive operating environment, there are a lot of questions as to whether the company’s style — heavily geared toward athletic performance — will be popular with consumers going forward.
Athleisure is becoming a massive market, especially in the U.S., and unless UAA is able to appeal to this group, it will have a hard time competing against rivals like NKE, whose clothing crosses over into everyday-wear.
The Bottom Line on UAA Stock
With a price-to-earnings ratio of 51.44 and a questionable growth story, UAA stock is expensive. Despite the stock’s massive decline so far this year, it’s not a buy. UAA has earned its negative sentiment, and until the company is able to prove that it will thrive in the future, I’d stay well away.
As of this writing, Laura Hoy was long AMZN.
