Broadly speaking, I’m a big athletic apparel bull. The thesis is pretty straightforward. Thanks to Instagram and Snapchat culture, consumers today are more obsessed than ever with looking active, fit and healthy. A big part of this look is wearing the right clothes, and the right clothes lie somewhere in the overlap of athletic fit, lifestyle fashion and multipurpose utility. Brands like Nike (NYSE:NKE), Lululemon (NASDAQ:LULU), and Adidas (OTCMKTS:ADDYY) check off all those boxes. That’s why each of those stocks is up more than 40% over the past three years, with LULU and ADDYY stocks both up more than 100%.
But, one athletic apparel stock which I’ve been unwilling to consistently ring the bull horn on is Under Armour (NYSE:UAA). This company has simply failed to meaningfully pivot its brand to align with broad consumer interests and trends. This failure to pivot has ultimately stifled UAA stock. While its big three peers are all up more than 40% over the past three years, UAA stock is down around 50% over that same stretch.
Unfortunately, things won’t get much better for UAA stock anytime soon.
The reality is that this brand continues to take the wrong steps. There’s a serious lack of product innovation relative to Nike, Lululemon, and Adidas. The brand continues to fail to pivot into the lifestyle category, which is where all the growth will be going forward. Meanwhile, brand equity is being by diluted because management is trying to boost sales by selling through lower priced channels, and mind-share and popularity are in free fall.
Overall, things aren’t pretty here, but this is the right space. As such, UAA stock is a buy at the price — but we aren’t at the right price just yet.
Data Shows That Under Armour Is Losing
The big idea here is that Under Armour is making all the wrong moves in the right space. Consider the following:
- The big-growth niche in the athletic apparel space is in the convergence of athletic and leisure styles, since most consumers are wearing these clothes to be comfy and look good, and can’t really tell the difference in terms of performance. Yet, Under Armour has failed to pivot into the lifestyle approach, and instead continues to double down on performance. Consequently, according to both a Piper Jaffray survey and B. Riley survey, Under Armour is largely an afterthought in the broader footwear category, whereas Nike and Adidas are powerhouses.
- Within the performance segment, Nike and Adidas are innovating rapidly, launching new styles often and pioneering things such as self-lacing sneakers. Under Armour is not launching new styles as quickly, and is behind the curve on breakthrough sneaker technology. Consequently, Under Armour is even losing share in the performance basketball market, per the aforementioned B. Riley survey.
- Under Armour continues to sell aggressively into lower-priced distribution channels like Kohl’s (NYSE:KSS), and as our own Vince Martin points out, it’s that lower-priced product that is moving, not the premium product. Thus, brand equity is being diluted, and that hurts the brand’s public image. Look no further that the results of the aforementioned Piper Jaffray survey, which show that Under Armour has been the top “downtrending brand” among male teens for two consecutive years.
In sum, Under Armour is simply not making the right moves in the athletic apparel space, and the result is that popularity, mind-share, and market-share are all dropping.
UAA Stock Isn’t Overvalued
The good thing about UAA stock is that, all things considered, it isn’t overvalued. The bad thing is that it also isn’t that undervalued, and dip buyers should consequently wait for a better entry point below $20.
In the big picture, the athletic apparel space expects as a healthy 4%-6% revenue growth market over the next several years, thanks to the aforementioned secular consumer demand tailwinds. So, Under Armour is in the right space. Eventually, the company will get its act together, stop losing market share and grow healthily alongside this burgeoning market.
Consequently, Under Armour reasonably projects as a 4%-6% revenue grower over the next several years. Meanwhile, I believe gross margins should trend higher because the brand will likely lean more heavily into direct-to-consumer sales, which should carry higher margins by eliminating the wholesale middle man. Opex leverage should also kick in as healthy revenue growth becomes the norm again.
All in all, I think Under Armour will hit $1.50 in EPS by fiscal 2025. Based on a Nike-average 25x forward multiple, that implies a reasonable fiscal 2024 price target for UAA stock of $37.50. Using a 10% discount rate, that equates to a fiscal 2019 price target of just over $23.
Thus, in the lower $20’s, UAA stock isn’t overvalued. But, it isn’t that undervalued, either. As such, I’m waiting for a dip below $20 to get bullish on a rebound in the stock.
Under Armour is the wrong company in the right space. That means that, for the foreseeable future, this is a “buy the dip, sell the rally” stock. Right now, the stock is dipping, so a buying opportunity is approaching. But, it’s probably best to wait for the stock to come below $20 before jumping in and playing the rebound.
As of this writing, Luke Lango was long NKE, and may initiate a long position in UAA within the next 72 hours.