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It Can Absolutely Get Worse for Under Armour Stock

Under Armour looks like a broken company -- one investors should avoid

Under Armour (NYSE:UA,NYSE:UAA) is in trouble. Under Armour stock plunged 17% last week after its fourth quarter earnings release — but that’s not the only problem. In fact, that’s not even the biggest problem.

It Absolutely Can Get Worse for Under Armour Stock
Source: 2p2play / Shutterstock.com

The issues facing Under Armour go well beyond a single report. After all, investors knew before the earnings report that the company’s turnaround was going to take time.

Certainly, it isn’t good news that Under Armour management itself believes little fundamental progress will be made in 2020. But that outlook would be tolerable if investors could have faith that progress was coming at some point.

It’s difficult, if not outright impossible, to have that faith at this point. Increasingly, Under Armour looks like a broken company. That, more than a single year’s guidance, is the problem with Under Armour stock.

How Under Armour Stock Got Here

Give credit where credit is due. Under Armour, under founder and former chief executive officer Kevin Plank, pioneered an entirely new category of athletic wear. A company founded in 1996 had nearly $5 billion in sales two decades later — and a market capitalization nearing $10 billion.

But since Under Armour stock peaked in 2016, pretty much everything has gone wrong. Strategically, the company erred by expanding distribution to weaker retailers like Kohl’s (NYSE:KSS) and now-bankrupt Sports Authority. Those moves undercut the brand — and the company’s pricing power.

Under Armour’s assortment hasn’t kept pace, either. While Lululemon Athletica (NASDAQ:LULU) drove market-leading growth in the “athleisure” category, Under Armour stayed stuck on the performance side. The company never truly has cracked the code in the women’s market, and initial success in footwear thanks to a partnership with NBA superstar Stephen Curry has faded.

It’s the company’s culture that might be the most concerning: a Wall Street Journal report in late 2018 detailed concerning behaviors among executives and questionable treatment of female employees.

Under Armour promised to do better — and, in some ways, it has. But UAA employees I spoke with still describe a toxic work environment and low morale. It’s not difficult to get the sense that something is seriously wrong with Under Armour as a company.

UAA Stock Tanks

Under Armour’s numbers certainly suggest that’s the case. The culprit behind last week’s sell-off wasn’t fourth quarter results themselves. It was the guidance for 2020.

The company is guiding for revenue to decline year-over-year by a “low single-digit” percentage. That comes after just 1% growth in 2019. In other words, 2020 sales should be roughly in line with those in 2018. In North America, revenues should decline as much as 10% over that stretch.

It’s only in relatively new international markets where Under Armour is seeing sales increase. At home, the company is losing to Nike (NYSE:NKE) and adidas (OTCMKTS:ADDYY).

Bottom-line numbers are even worse: 2020 guidance is for earnings per share of just 10 cents to 13 cents; compare that to 2016, when the company generated 45 cents in EPS.

That guidance suggests net margins at less than 0.5% of revenue. This is a company that just last year was promising operating margins over 10% by 2023. EPS was supposed to grow at a 40% annual rate for several years. Instead, guidance suggests net profits will fall 35-50% in 2020.

This isn’t the first time Under Armour has overpromised. Unless something changes soon, it likely won’t be the last.

The Bottom Line: Not Enough of a Bull Case

It’s possible Under Armour can find a way to a turnaround. Plank stepped down last year. Management last week floated the idea of another restructuring, which could reduce longer-term costs. Sub-1% margins are a worry now — but they also leave substantial room for improvement.

But there’s just no evidence right now to suggest that improvement is coming. Nike and Adidas have caught up in performance wear. Lululemon dominates on the women’s side. Under Armour, meanwhile, has lost its way. It will take years for the company to find it again.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/02/it-can-absolutely-get-worse-for-under-armour-stock/.

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