I’ve been harping on Under Armour Inc (NYSE:UAA) and its problems for quite some time. I’m not trying to be rude. It’s difficult running a business. However, part of my job is warning investors away from troublesome stocks that will cause them to lose capital. UAA stock is the perfect example, and it’s also a perfect example of why I always avoid retail clothing stocks.
Translation of UAA’s Latest Earnings Call
Today, I want to show investors something that isn’t always on their radar, and that’s the transcript from Under Armour’s last conference call. We’ll get another transcript soon as UAA will be reporting Q4 results. When that happens, we’ll be able to contrast the language from that call with the language in the Q3 call.
Here are some quotes from UAA’s last earnings call, with my translations in brackets:
“Right now, we’re sitting squarely at the intersection of two concurrent events. The first is an uneven macro environment highlighted by geographic variance [international growth is beating domestic because international expansion is newer], retail disruption [Amazon.com], competitive undercurrents [we sell what is an effectively commoditized product now] and changing consumer preferences [consumers are fickle].”
Therein lie all the challenges of operating a retail clothing business. It’s all right there. International expansion frequently comes after domestic growth starts to slow. Amazon.com, Inc. (NASDAQ:AMZN) has disrupted the entire retail world. There is fundamentally nothing different between Under Armour’s products and those of other sports apparel makers.
Worst of all, the primary thing that keeps me away from retail clothing stocks is that consumer preferences can change on a dime without rhyme or reason. Here’s more from UAA’s latest call:
“The second side of the intersection are the growing pains that came as a result of such rapid expansion [we took on way too much debt]. As detailed on previous calls, we’re well underway with a strategic transformation designed to simplify our go-to-market [we are cutting expenses], correct our inefficiencies [we are cutting expenses] and take advantage of the scale and infrastructure we’ve built to better serve our consumers [we are cutting expenses].”
Challenges for Under Armour
The trajectory of businesses like UAA is getting past the start-up phase, achieving scale, going public to finance faster growth, achieving faster growth along with the rewards of a higher stock price, and taking on debt to fuel that growth even more as growth starts to decline a bit.
Then domestic growth declines as international growth takes off, and then it’s make or break for the business. Either it scales internationally, and the domestic business’s growth and cash flow helps pay for that expansion, or things start to fall apart.
The usual plan of attack, one which Under Armour appears to be taking, is to restructure things internally. That plan can succeed in creating efficiencies and saving money. Yet that also requires tapping into something Under Armour cannot control, which is how consumers respond to its products. Somehow companies like Nike Inc (NYSE:NKE) seem to be able to repeatedly figure this out.
However, I suspect UAA needs to completely reimagine what kind of company it is and what products it offers. This is exceptionally challenging for a retail clothier.
A great example in the restaurant space is McDonald’s Corporation (NYSE:MCD). McDonald’s has a devoted base of consumers that will always exist. The problem was they were just bored with the product so they drifted away. The company’s turnaround was based on a simple concept: “the same, but different.” It succeeded and not only brought back bored consumers, but attracted new ones.
That’s not so easy for an apparel company because there isn’t a devoted base of consumers that can always be accessed. Once lost, they can be lost for good.
I hope that Under Armour stock turns around, but I’m not terribly optimistic.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market and has written more than 1,800 articles on investing. Lawrence Meyers can be reached at [email protected].