There’s no denying the marketing value of being able to say the starting quarterbacks for both teams playing in this weekend’s Super Bowl will be wearing clothing made by Under Armour Inc (NYSE:UAA, NYSE:UA).
It’s the first time this has ever happened — and it may be the last.
Indeed, the fact that it’s being discussed is proof of the potential marketing firepower this stroke of luck has. If any current or prospective owners of UAA stock think this is going to be the game-changing catalyst the company has been waiting on, though, think again. Under Armour remains a name that’s under fire, stemming from too many years of unbridled debt growth all in the name of sales growth.
One ugly picture can put it all in perspective for you.
It’s (Still) All About the Benjamins
A little over a week ago — for a reason and under circumstances that are still not entirely clear — Under Armour’s short films arm (yes, apparently they have one) played a produced video clip for the U.S. bobsled team, explaining the unlikely journey the company has made since its inception in 1996. The video was packed with plenty of thrills and plenty agonies of defeat, highlighting the ups and downs of Stephen Curry and Jordan Spieth, both of whom are paid to wear and tout Under Armour’s apparel. The same film also offered some encouraging words from football greats Tom Brady and Ray Lewis.
The UAA film division produced “Ice Blazers,” telling the story of how Nigeria’s first-ever bobsled team will be competing in this year’s winter Olympics, as well.
The short films are not only motivational, but also great publicity. Thing is, videos don’t necessarily pay the bills. Right now, Under Armour needs money — a lot more than it is making.
Anyone reading this likely already knows the story well enough, but on the off chance someone is mulling a purchase of UAA stock that’s not terribly familiar with the company, here’s the abridged version of the story: Under Armour has spent too much in the past for big-name endorsements and sponsorships without getting enough in return. It’s finally coming back to haunt the company.
It’s an easy idea to put into words, but words alone don’t capture the magnitude of the issue. Rather, it’s far more effective to tell the Under Armour story with a literal picture of how its revenues, profits, debt and interest payments have changed over time.
The graphic below speaks for itself.
Click to Enlarge
From this perspective, the reality becomes clear. Rather than widen its margins and grow profits as it scales up, it’s cost more for Under Armour to scale up than it was worth.
Can it change? Sure, but that’s not the overarching question at hand here. The question is, will it change in light of the company’s habits?
Looking Ahead for UAA Stock
There is a counterargument, even if it’s a feeble one for the time being. Patrik Frisk was named President and COO in mid-2017 and it’s largely suspected he was brought in to keep a lid on CEO Kevin Plank’s unchecked spending habits. It might just work, too.
The counterargument to the counterargument is two-pronged.
First, though athletic apparel was all the rage just a few years back, it’s a mania that’s largely cooled off. As Wells Fargo analyst Tom Nikic politely put it last year, “The athletic apparel/footwear space was one of the strongest sub-sectors in our group coming out of the recession; but after an impressive multi-year growth cycle, we see several areas for concern that are not only likely weighing on the industry, but also have the potential to accelerate.”
Whatever strength the sliver of the apparel market had left is also now being addressed by, of all companies, category-killing Amazon.com, Inc. (NASDAQ:AMZN).
Second, as Luke Lango recently detailed, for all that Under Armour has done, it’s still trailing Nike Inc (NYSE:NKE) and Adidas AG (ADR) (OTCMKTS:ADDYY) in terms of driving demand for its products. Lawrence Meyers more recently touched on the same idea, explaining that consumers just aren’t responding to its efforts by purchasing clothes.
Some sort of reinvention is in order, which is amazingly difficult to do with a product line as simple as clothing and a buying public that’s already made judgments about where brand names fit in.
Of course, even if Under Armour could sway consumers with a new shtick, it’s still left paying the bills from yesteryear, and still trapped in troubling spending habits. Indeed, it’s tough to find something anything you can really like about UAA stock. That may be why it’s down 32% for the past twelve months, and still sinking.
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.
