3 Problems Under Armour Inc Needs to Fix These Before It Is a Buy

UA stock won’t be a buy until is demonstrates turnaround potential

By Laura Hoy, InvestorPlace Contributor

Under Armour Inc (UA) Stock's Recent Surge Is Just a Head Fake

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It’s been another difficult year for apparel maker Under Armour Inc. (NYSE:UAA, UA) and 2018 isn’t looking much better. UA stock has fallen more than 50% so far in 2017 as its turnaround plans continue to falter. Under Armour is struggling with fading consumer enthusiasm in the US, poor inventory management and turnover in within its high-level management team.

Those problems have weighed heavily on investor sentiment. With UA stock price dipping into the low teens, some are wondering if now is the time to buy. However, I’d hold off until the firm addresses its problems and proves that it’s on a more stable path to recovery.

Inventory Issues

There are a lot of reasons that UA stock is struggling, but one of the firm’s huge issues has been that people are simply not buying what Under Armour is selling. Back in 2015, it looked like UA might eventually be able to catch rivals like Nike Inc. (NYSE:NKE), but fast forward to today and it’s a much different picture.

Under Armour’s most recent earnings report showed that apparel revenue was down 8% and gross margin sunk to 46.2%- a 130 basis point drop. Profit was down 7.5% and net income was down $28.2 million. However, even more concerning was the fact that inventory rose by 22%.

As InvestorPlace’s Lawrence Meyers pointed out, rising inventory plus falling revenue equals crowded stockrooms. Under Armour has an exceptionally long lead time of 18 months, so that means the probability of getting rid of the old inventory is pretty low.

In the fashion world, 18 months is a lifetime and short of practically giving it away, UA is going to struggle to move those goods. Something needs to change. Whether it’s marketing and promotions, supply chain management or all of the above, UA needs to manage its inventory better and get its goods off the shelves.

Fading Popularity in North America

Another of UA stock’s biggest problems is the data showing that Under Armour is falling out of favor in the US. North American revenues were down 12% in the most recent quarter, and that’s a big problem because North America is where the majority of the firm’s business comes from.

Management pointed to 35% growth internationally as a sign that the company is flourishing in other parts of the world- but keep in mind that 35% growth makes up about15% of the company’s overall revenue. It’s becoming clear that UA isn’t connecting with U.S. consumers anymore.

One reason for this might be the fact that the brand’s focus on performance athletic wear failed to capitalize on the rise of “athleisure” clothing. At the beginning of the year, UA’s management team acknowledged this shortcoming and vowed to focus a bit more on the fashion side of things.

However the fact that apparel revenues were down 8% in the third quarter suggests that any efforts toward more stylish kit have been in vain.

Management Shakeup

The third big reason that UA stock has been on a downward trajectory over the past year is the fact that multiple Under Armour executives have left the company.

At the beginning of November two more senior-level execs, Marketing Chief Andrew Donkin and Senior Vice President and GM of both the women’s and youth categories Pamela Catlett, each elected to abandon the sportswear firm.

That came on top of the departures of several other high-level executives including Kip Fulks, who was one of the company’s co-founders. That many managers jumping ship at a time when the company is clearly struggling is worrying from an investor’s standpoint.

Not only does it suggest that they don’t see UA heading in a profitable direction, but it also calls into question the stability and direction of the company’s overall strategic plans.

There’s a chance that fresh faces in UA’s management team will breathe new life into the brand. Clearly what the old execs were doing wasn’t working.

However, with so many departures so close together, it is worth waiting to see whether or not the new team will be able to come together and give investors a reason to believe in UA stock again.

The Bottom Line on UA Stock

UA stock is nearing rock bottom, but I don’t think its there yet. I think Under Armour has the potential to pull off an impressive rebound, but there are still too many problems that haven’t been addressed to convince me to take a position.

As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2017/12/ua-stock-fix-buy/.

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