Recently, I started a new series of looking at the other side of the fence for stocks I avoid. It’s been a refreshing experience as I believe understanding the opposing view helps solidify your own perspective. I’ve performed this exercise for Advanced Micro Devices, Inc. (NASDAQ:AMD) and GoPro Inc (NASDAQ:GPRO). But my biggest challenge yet is Under Armour Inc (NYSE:UAA).
I can’t stress enough how bearish I am on UAA stock.
For well over a year, I covered Under Armour through its ups and mostly downs. Each time, I’m repeating the same themes time and again. To summarize, UAA is spending excessive resources playing a game it can’t possibly win. It’s not a unique argument, yet I find it crazy that management refuses to acknowledge the obvious.
InvestorPlace contributor James Brumley recently stated what is perhaps the most eloquently succinct diagnosis on UAA stock: Under Armour “spends more, gets less.” For whatever reason, the corporate directive is to sign as many superstar athletes to endorsement deals. The big problem, as I’ve pointed out, is that the upstart athletic apparel company is squaring up to industry stalwarts.
Clearly, adidas AG (ADR) (OTCMKTS:ADDYY) and Nike Inc (NYSE:NKE) are going to have a say in the endorsement turf war. But even putting that issue aside, declining retail markets impose painful dilemmas. Consumers must have a compelling reason to buy discretionary items; otherwise, they just won’t do it. Finally, NFL ratings slumped and may continue to slump for a variety of reasons.
In short, UAA stock has to climb a 100-foot wall of bearishness with nothing but some rope and gym chalk. I don’t see it happening. But to have a reasonable chance of recovery, Under Armour needs to make a serious change in their business.
UAA has to Cut the Fat!
First and foremost, the apparel maker must unequivocally cease high-dollar endorsement deals. If fewer people are watching Tom Brady play football, fewer people are interested in his personal and professional endorsements. The return on investment is simply not up to snuff.
Second, Under Armour needs to stop their overly ambitious inroads into the English Premier League (EPL). The trouble with their Southampton Football Club deal is that the target team is middling at best. But the bigger challenge is that European sports leagues feature relegations. This means that the bottom tier teams get relegated to a second-rate league. On the flip side, the top teams of the aforementioned league are promoted.
Ironically, although our economic system is capitalistic, our professional sports leagues are completely socialist. In European sports organizations like the EPL, if you don’t perform well, you are punished. In American sports like the NFL, you receive superior draft picks.
The risk to UAA, of course, is that if Southampton runs into a bad patch and becomes relegated, that translates to at least one year of being forced to play in a lesser-profile league. I’m not sure that’s a risk worth taking given their company’s debt exposure.
Third, Under Armour must think small and think domestically. Declining sports viewership isn’t just a headwind here; it’s also impacting our friends across the Atlantic. At least by sponsoring American teams, the company can compete with home-field advantage.
Sadly, association football (or soccer as we call it) is not getting any popular here. Dumping more money into foreign leagues doesn’t make much sense anymore. For the benefit of UAA stock, Under Armour should take some Presidential advice and put America first.
Opportunities Beckon, but Under Armour Won’t Listen
Given the ridiculous bubble in major-sports endorsement deals, Under Armour should look where the ROI is highest. I think the biggest bang for the buck is IndyCar.
Verizon Communications Inc. (NYSE:VZ) spent $100 million for a ten-year IndyCar title sponsorship. I think it’s a much better deal than sponsoring one golfer at twice the rate. Plus, you have the Indianapolis 500 in the lineup, which brings in record crowds and massive TV viewership.
Furthermore, I appreciate the fact that the IndyCar organization revamped their race cars for 2018. It’s not just an aesthetics improvement; the redesign also aims at reducing manufacturing costs. Essentially, IndyCar is one of few professional sports leagues that are incentivizing sponsorships, not turning them away. In my opinion, IndyCar is a perfect catalyst for UAA stock.
But everything I just said is completely pointless. While I would hope for UAA shareholders that their management team would acknowledge reality, they won’t. They’re too committed to staring down Nike and Adidas. Unfortunately, this ego trip is about to land the apparel maker in even deeper trouble than they’re already in.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.