Under Armour Inc (NYSE:UAA) was a must-have investment through the middle of 2015. In step with the meatiest portion of the company’s meteoric growth, UAA stock rallied from a split-adjusted price of $1.80 per share in early 2009 to a peak of around $50 in June of 2015. That’s roughly a 2,700% rally.
Since the middle of 2015 however, it’s been a radically different story. Under Armour stock has fallen back to its current value in the mid-$17s — a 65% pullback from its peak.
What gives? The high-brow answer is: Under Armour never lived up to its implied potential and as such never justified the habitually frothy valuation of UAA shares. The brutally honest and plain-English explanation is that Under Armour was ultimately built on a flawed premise, and the company could never break out of the trap it set for itself.
Bad Spending Habits
The athletic apparel company is a household name, even if there’s no Under Armour in your particular house. The brand is best known for signing high-profile endorsers like Tom Brady, Jordan Spieth and Stephen Curry, just to name a few.
Such celebrity sports stars don’t come cheap. On the other hand, if you’re going to make a dent in the dominance of rivals like Nike Inc (NYSE:NKE) and a still-surprisingly relevant Adidas AG (ADR) (OTCMKTS:ADDYY), you have to do what you have to do. That includes being willing to spend a little money now in order set the stage for a big, profitable payday later.
Under Armour’s problem was that it got in the bad habit of paying nearly any price to add a new sports superstar to its stable. Case(s) in point: Its 10-year deal with Jordan Spieth is worth an estimated $200 million, and its contract with Stephen Curry is almost certainly a deal worth hundreds of millions of dollars. It’s even shelling out nearly $300 million to become the namesake sponsor of UCLA’s sports program.
And much like a drug, the company hasn’t been able to kick the habit of paying sports stars whatever they wanted.
To be fair, UAA has grown its bottom line along with its top line over the course of the past several years. It’s simply not been enough bottom-line growth.
The graphic below puts things in perspective, plotting the company’s cost of goods, selling and administrative expenses and its net income as a percentage of Under Armour’s total revenue, 2017’s data only considers the first two reported quarters of the year.
The point isn’t difficult to see: Production, marketing, advertising and management are costing the company relatively more and more, leading to less and less profitability. It’s a problem for current and would-be owners of UAA stock simply because one generally expects an organization to become a stronger operation and enjoy economies of scale as it grows. Under Armour is drifting in the other direction.
Though it wouldn’t be accurate to blame the whole headwind on the company’s penchant for writing big checks for celebrity endorsements, that’s a huge component of the headwind.
The Truth of UAA Stock is Surfacing
A second problem that’s still ultimately the result of spending too much money on people and too little money on everything else; Under Armour’s athletic shoes are actually a bit of a joke. Nike’s superstar spokesperson Kevin Durant didn’t pull any punches last week in that regard, suggesting nobody played basketball in Under Armour’s shoes unless they contractually had to. He added “Everybody knows that. They just don’t want to say nothing.”
Yet, Durant’s jab more or less aligns with something stock guru Jim Cramer also recently opined: “[Under Armour’s] move into sneakers [has been] an unmitigated disaster because of Nike.”
Perhaps if Under Armour had a little more money available to direct toward market research and product development, Durant’s take may not have rung so alarmingly, quietly true.
And just for the record, Adidas’ cost of goods sold for the past four quarters is on the order of 51% of its revenue. Nike’s has been a bit frothier than Under Armour’s, at 55%, but Nike can afford to spend it. Meanwhile, Adidas’ selling and administrative expenses have only been 39% of sales, while Nike’s has only been 31%. That’s a stark contrast with the kind of bucks Under Armour is shelling out just to be seen.
Bottom Line for Under Armour Stock
None of this is to suggest UAA stock is un-ownable. Indeed, there is a price out there at which Under Armour stock becomes an outright bargain. Under Armour could also tighten its belt and start to make more money without buying the bulk of its growth.
Neither of those possibilities are on the near-term radar though, making UAA shares a falling knife you don’t want to try and catch anytime soon.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.