Two days before Christmas Day 2016, I wrote about Under Armour Inc (NYSE:UAA) and Nike Inc (NYSE:NKE). It was one of those straightforward bits about which was the better buy, UAA stock or NKE stock? Ultimately, I recommended Nike:
“It’s a tough choice, but with Under Armour making a big bet on retail, one that won’t play out for at least a couple of years, and Nike finally realizing it can do so much more with its own direct-to-consumer business, I have to go with NKE stock — at least until it becomes clear UAA stock is on the right track with its DTC.”
First of all, in hindsight, it wasn’t a tough choice at all. UAA stock lost 50% of its value in 2017 compared to a 25% gain for Nike.
Under Armour completely ran off the road this past year getting stuck in the mud which has investors like InvestorPlace’s Lawrence Meyers recommending shareholders exit their positions post-haste.
“If you own UAA stock, you need to get out. Just sell it. If it means taking a loss, take it. It you are somehow sitting on a gain, grab it,” Meyers wrote January 9. “I simply do not see how UAA gets out from under this mess.”
Lawrence, tell us how you really feel.
Where Did it Go Wrong?
I’m not going to rehash the entire grocery list of mistakes the company made in 2017. Suffice to say there were a few.
Instead, I’ll merely examine one of the points I discussed in my pre-Christmas article, that either failed to come true or weren’t nearly as successful as planned.
I think if you still own UAA stock more than a year after my bit, it’s time to accept that the company overpromised and underdelivered — in a big way.
Direct-to-Consumer
One of my main points a year ago December was the acknowledgment by Under Armour CEO Kevin Plank that the company’s operating and gross margins were taking a step backward as a result of its investment in retail.
I wrote:
“In October, when Under Armour announced its Q3 2016 earnings, Plank and company hammered home the point that it’s taking a hit on operating margins over the next two years (gross margins to remain flat) as it invests in its direct-to-consumer business, both online and brick-and-mortar.”
So, let’s have a quick look at what’s transpired.
In its Q3 2017 earnings call, Plank reminded investors that the quarter saw direct-to-consumer (DTC) revenues increase 15% to $468 million from a year earlier as a result of strong numbers in both its retail and e-commerce businesses around the world.
DTC revenues now account for 33% of the company’s overall sales. However, on the downside, the company grew DTC revenues in Q3 2016 by 29%, double the growth rate of a year later.
Where’s Under Armour Headed?
Is Kevin Plank going to come out and suggest growth will return, overpromising as he did in late 2016?
“[UA] getting big fast, making retail a core competency, and getting more shoes on feet,” said Plank on its Q3 2016 conference call. “We’re not saying we’re losing money … we’re moving and marching forward.”
Yes, DTC revenues did grow by double digits in the latest quarter, but the overall revenues fell by almost 5% with apparel taking an 8% hit to its sales. Its fiscal 2017 outlook calls for adjusted operating income of $145 million, the lowest number since 2010 when it had one-fifth the revenue.
The elephant in the room was addressed in Under Armour’s Q3 2017 conference call by Cowen & Company analyst John Kernan.
“The direct-to-consumer guide for high single-digit for the year implies a pretty enormous deceleration in the fourth quarter,” asked Kernan. “Is there anything going on there? Are you closing doors and how does domestic DTC and international DTC play into that guidance?”
CFO David Bergman answered Kernan by dancing around the question and they moved on to its plans internationally.
The Jury is Still Out on UAA Stock
It’s safe to say that my colleague would characterize UAA stock jump of 13% in the past month as a dead-cat bounce.
Plank and Bergman’s inability to discuss a part of its business (DTC) in greater detail that represents 33% of its overall revenue tells me one of two things.
It either doesn’t want the competition to know what it’s up to or the retail experiment is failing badly.
I’d go with the latter.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
