Credit has to be given where it’s due. Athletic apparel outfit Under Armour Inc (NYSE:UA, NYSE:UAA) has told a compelling turnaround story to current and would-be owners of Under Armour stock. This year is supposed to be a pivotal year too, with the organization finally figuring out — supposedly — what it needs to do to start growing the bottom line rather than just the top line.
And, maybe it has. Somehow though, I have my doubts.
Between the still-huge mountain of debt (plus the bad habits that created it in the first place) and a competitive environment that includes powerhouse Nike Inc (NYSE:NKE) and the Amazon.com, Inc. (NASDAQ:AMZN), Under Armour’s turnaround isn’t apt to be nearly as quick or as impressive as some UA stock owners would like to believe.
A Tall Order
In a conference call hosted a couple of weeks ago, Under Armour CFO Andy Campion plainly said “We remain confident we will deliver on the growth and profitability expectations that we have previously communicated.”
Progress for the bottom line would be a welcome change. Though Under Armour has never had a problem growing sales, it’s primary means of competing with the likes of Nike and adidas AG (ADR) (OTCMKTS:ADDYY) has been ever-deepening discounts.
Amazon.com is in the mix too, spurring gross profit declines for a couple of years in a row as of 2017, and prompting a swing to a loss for last year.
Some analysts agree with the optimism too. Michael Zuccaro, analyst with debt-rating agency Moody’s, is one of them. He sees the glass as half full rather than half empty, recently noting “China, in particular, remains strong, with sales of active wear and athletic apparel benefitting from increased sports participation.”
He’s got a point. Last year, Under Armour stock holders saw a 61% improvement in Asia-Pacific sales, offsetting the 5% dip in North American sales.
Problem: North America still accounts for more than three-fourths of the company’s business, while Asia still contributes less than 10% of the top line.
Throw in the fact that China just dealt its first (new) blow in a trade war by imposing some tariffs on select products made in the United States (only food, so far, but the war could escalate) and what you’ve got is a truckload of uncertainty about a group of consumers that aren’t unwilling to boycott American brands in support of their nation.
Missing the Point
That’s all assuming China was going to continue to be a source of growth, of course, and that sales in the U.S. would normalize. Not everyone see both happening to a meaningful degree.
Take Canaccord Genuity analyst Camilo Lyon’s prognosis, for instance. He recently explained “we see the risk of a prolonged and pervasive promotional cycle and subsequently a brand that could lose its cachet, none of which is embedded in [the] current valuation.”
Fans and followers of Under Armour stock will push back, pointing out that innovation from Under Armour will change its trajectory for the better. That’s a big “if” though.
Yes, CEO Kevin Plank recently touted a recent restructuring, noting “we went from [having] a head of apparel, a head of footwear, a head of accessories to … [having] distinct categories, like a head of running, a head of training, a head of basketball.” The idea is that the company was rethinking everything from the top down, and as such would become more competitive.
Its rivals are innovating as well, however. Lyon went on to say with his recent reiteration of Canaccord Genuity’s “Sell” rating on UA stock:
“NKE’s new ‘triple double’ directive is undoubtedly taking shape. Specifically, we see signs that its product pipeline is gaining traction, which would not be good for UAA. Moreover, Adidas has become a more formidable competitor in recent years as evidenced by its 29-percent growth in North America in Q4.”
When all is said and done it’s people that design shoes and apparel rather than organizational flowcharts. People create the ads used to market the company’s merchandise. Reformatting the design-to-delivery process doesn’t make its shoes a must-have good, as it’s still the same people leading the charge.
Bottom Line for Under Armour Stock
A lost cause? No, Under Armour may well get back on track, able to grow its top and its bottom line in the foreseeable future.
It’s tough to say Under Armour stock is a “Buy” here though. At best, the turnaround project will be a lengthy and inconsistent one. The company is not only culling expenses – which it’s not dealt with on a regular basis in the past – but it will take time just to regroup.
Moody’s Zuccaro further noted “For the first nine months of 2018, we expect the company to generate negative free cash flow due to lower earnings, normal working capital seasonality, continued spending in key growth areas, and $105 million in cash expenses related to the new 2018 restructuring plan.”
In other words, getting from point A to point B might be a journey investors would be wise to steer clear of, holding off on any new stakes until it’s clear any of the rebound plan is working.
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.
