By no stretch of the imagination can it be said Under Armour Inc (NYSE:UA, NYSE:UAA) had a good or even palatable year. Though the year’s not quite over yet, the UA stock price is down 45% since the end of 2016 — and that’s with the recent upgrade-inspired advance.
The stock’s weakness, in conjunction with legitimate-sounding chatter about a turnaround, understandably has some investors mulling an entry into the beleaguered name. Indeed (and as was noted), Under Armour was just upgraded for a reason. Presumably the analyst who did the deed knows what he’s talking about.
What if, however, expectations for a rebound are more bark than bite?
Realistically speaking, that’s what seems to be the case.
It was Stifel analyst Jim Duffy that upgraded UA stock, by the way. Previously deemed a “Hold,” now he sees it as a “Buy.” He also upped his UA stock price target from $12 to $17. Duffy noted:
“With evidence of improving sales quality and cost structure management, we expect the stock begins to anticipate structural capacity for margin improvement before it shows in reported results.”
Duffy added that Under Armour’s business should be “in a much better position entering 2019.” Of particular interest was the analyst’s expectation for better cost control, though he’ll also be looking for better inventory management.
Duffy’s analysis cuts right to the heart of the matter. CEO Kevin Plank has a long history of indiscriminate spending in the name of growth, and inventory management has been more than a small challenge for the fast-growing athletic apparel outfit.
The mindset has gotten a bit old with faithful owners of UA stock, though, who in 2016 started to realize sales growth was no longer keeping pace with Plank’s spending habits. The UA stock price has fallen 70% from its early 2015 peak, as frustrated investors have sold their stakes.
Ultimately, Duffy is betting that Plank has learned a lesson and is kicking the habit of ill-advised spending. It’s not clear Plank has done so, however.
There’s nothing more compelling than a turnaround story, so investors and analysts alike have been more than willing to at least keep tabs on the one Under Armour is attempting right now.
Realistically speaking, though, it’s a rarity for an adult to replace old habits with new ones. And Plank’s willingness to spend seems quite deep-seeded. In an early 2016 interview he did with Inc. magazine, Plank explained:
“I love Monopoly. You know why? When I play Monopoly with you, I’m going to buy everything from Baltic Avenue to Marvin Gardens. If you get to my side of the board, you’d better roll boxcars or you’re going to pay rent.”
He was talking about the acquisition of MapMyFitness at the time, though it’s a microcosm of how Plank has been willing to spend any amount of money for just a modest chance to grow the company’s top line.
The end result is Under Armour is now sitting on $2-billion worth of debt and near-term obligations. That’s a massive burden for a company that’s only managed to turn $4.9-billion worth of revenue for the past 12 months into net income of $143 million.
So simply replace him and let someone with more discipline take the helm of the easily recognized brand? Not so fast. Plank is, for all intents and purposes, in control of the company via his ownership of roughly two-thirds of Under Armour’s shareholder votes. He’s not going to step down until he wants to.
There’s certainly always a chance Duffy’s got an insight nobody else has regarding Plank and Under Armour. It’s not likely he sees something no one else does, however.
And even if he does, there’s still the not-so-small factor that rivals Nike Inc (NYSE:NKE) and Adidas AG (ADR) (OTCMKTS:ADDYY) are just as hungry as Under Armour is and willing to go to great lengths to protect their market share at a point when consumer interest in athletic apparel is waning.
Never even mind the fact Amazon.com, Inc. (NASDAQ:AMZN) is mulling an entry into the active wear race. Amazon is a company that cares little about turning a profit and could certainly outspend Under Armour if it wanted to.
It remains to be seen if Plank will be able to control costs, as Duffy expects, when the competition really gets heated. That’s ultimately the bet any bulls are making here.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.