I’ve been a vocal bear on struggling athletic apparel company Under Armour Inc (NYSE:UA, NYSE:UAA) for some time now.
Whereas UAA stock was once destined for greatness thanks to a seemingly perfect relationship with Golden State Warriors superstar point guard Stephen Curry (it was a marriage of two up-and-coming underdogs), the underdog magic that sparked UAA stock to $50 has disappeared.
The brand failed to innovate throughout its product line. They didn’t align themselves appropriately with the athleisure trend, remaining a performance brand as opposed to a lifestyle brand. They failed to build on what was once a robust athlete portfolio (Under Armour hasn’t added any notable athletes to its line-up in some time). And they haven’t built up their brand equity to be on par with Nike Inc (NYSE:NKE) and Adidas AG (ADR) (OTCMKTS:ADDYY).
Revenues have fallen . So have margins. Earnings have been wiped out. And so has UAA stock. It now sits at $15.
But the bottom isn’t in on UAA stock. Not yet. The company continues to cede popularity to Nike and Adidas where it matters. In the meantime, Under Armour is building brand equity through Kohl’s Corporation (NYSE:KSS), and that isn’t necessarily a good thing.
Overall, revenues may stabilize, but margins will keep falling. Earnings won’t improve by much. And UAA stock won’t be a winner.
Under Armour Is Losing Where It Matters
My biggest problem with UAA is that the company is losing where it matters, which is in the premium-end athletic apparel market (this is where valuable, high-margin brand equity is built).
If you go check the best-selling lists on the websites of premium athletic apparel retailers like Dicks Sporting Goods Inc (NYSE:DKS) and Foot Locker, Inc. (NYSE:FL), you’ll see just how wide the popularity discrepancy is between Nike/Adidas and Under Armour in that channel.
The top selling Men’s Athletic Sneakers list on Dick’s website is headed by Nike and Adidas shoes. Under Armour sneakers don’t show up until a few scrolls down. The same is true for the top selling men’s running shoes list on Dick’s website, except worse. Its dominated by Nike and Under Armour, and even a pair of New Balance kicks are above Under Armour’s most popular running shoe.
The narrative is the same on Foot Locker’s website. Nike and Adidas dominate the top-selling Men’s Running Shoes list.
The narrative is also the same on the women’s side of things. Under Armour lags in the athletic sneakers and running departments at Dick’s. The brand also lags in the running department at Foot Locker.
Moving onto basketball, the narrative is still the same. Under Armour’s Curry line of shoes continues to fall behind Nike basketball sneakers on Dick’s website. The same is true on Foot Locker’s website. Under Armour makes a stronger showing in women’s basketball shoes on Dick’s, but Nike still hold three of the top four selling spots. Meanwhile, the best-selling women’s basketball shoes at Foot Locker are all Nikes.
Under Armour does make a strong showing on the top selling men’s and women’s Shirts lists on Dick’s website. That is a material positive. But at the trendier Foot Locker, Under Armour shirts aren’t doing so well on either the men’s or women’s side.
Across the board then, we see confirmation that the trend of Under Armour ceding popularity to Nike and Adidas in the premium end market is still intact.
Granted, Under Armour is killing it at Kohl’s. But that is a problem for the brand. Not only is that a lower-margin sales channel for Under Armour, but its also a discount retailer, meaning consumers are affiliating the Under Armour brand with terms like “discount” and “knock-off.” Margins don’t rebound when your brand is shifting from premium to discount. Instead, revenues may stabilize, but margins will keep coming down.
Bottom Line on UAA Stock
At nearly 80-times this year’s earnings estimate, UAA stock needs margins to inflect upward in order for the stock to be a winner.
Given current dynamics in the athletic retail market, that inflection won’t happen in the foreseeable future. Consequently, UAA stock remains a sell.
As of this writing, Luke Lango was long NKE, DKS, and FL.
