Bad Management Means Game Over for Under Armour Stock

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Things look bleak for Under Armour (NYSE:UA,NYSE:UAA). Shares have tumbled more than 50% since last month’s quarterly earnings release. Sure, you can blame the recent market-selloff as part of the reason why Under Armour stock has crashed and burned. But the company’s chickens are coming home to roost. This former American success story is now a floundering basket case.

Under Armour stock
Source: Sundry Photography / Shutterstock.com

They could have been the next Nike (NYSE:NKE). Instead, the company has more than lost its momentum. With poor 2020 guidance, it’s tough to see light at the end of the tunnel. Add in the temporary closure of Under Armour stores in light of the coronavirus from China, and it really looks like “game over.”

With shares heading south, you might feel the itch to make a contrarian buy. My take? Fight the urge! It may look like an opportunity to buy a major brand on the cheap. But, diving into the fundamentals for Under Armour stock, you’ll know that’s far from the truth.

With long-shot odds of turnaround and potential accelerated sales declines, Under Armour could go down a lot further from here.

Recent Crisis Means More Bad News for Under Armour Stock

What went wrong with this overnight success story? Disrupting the athletic apparel space, Under Armour became a multi-billion dollar brand in less than two decades. Yet in the past few years, the company has dropped the ball numerous times.

Firstly, by undercutting its brand value. Under Armour should still be a premium brand. But, by over-expanding distribution, they diluted the brand’s value and pricing power. Secondly, the company rested on its laurels. They failed to parlay success in performance wear into other areas, such as athleisure, which is dominated by Lululemon Athletica (NASDAQ:LULU).

Lastly (and most telling of all), a toxic work culture. With the company’s “bad behavior” now well-known, I’d think the company would do more to salvage its reputation. Based on conversations I’ve had with Under Armour employees, things haven’t gotten better.

All of these factors can be clearly seen in the company’s recent poor guidance for 2020. Granted, results for the fourth quarter of 2019 weren’t bad. Revenue grew 3.6% year-over-year. Adjusted earnings popped 11.1%. But past performance is irrelevant if the future holds poor prospects.

Instead of a sales rebound, Under Armour expects “low single-digit” growth. And this “growth” is only due to international expansion. Back home in North America, the company expects sales to decline. Wall Street may have projected 47 cents in earnings per share for 2020, but guidance now calls for diluted earnings this year of just 10 cents per share.

This lowered guidance came before the coronavirus outbreak became a major crisis in the United States. With the company closing locations, and the risk of the crisis causing an economic downturn, things could get even worse for floundering Under Armour.

How Low Could UA Stock Go?

The more you think about it, the more you realize how much of a death knell the coronavirus outbreak could be for Under Armour stock. Not just the fact stores will be temporarily closed. With the NBA and other sports on hold until the crisis ends, there’s less at play to shore up demand for the company’s products.

Also, think about how the company’s poor performance started when the economy was firing on all cylinders. If belts get tighter, I can’t help but see sales declines accelerate further. And forget about the already long-shot odds of a turnaround. Despite the company taking as much as $425 million in restructuring charges this year, they may wind up having nothing to show for it.

To top it all off, the current price of Under Armour stock may yet to reflect all these downside risks. Despite shares falling from around $24 per share to under $9 per share since July, the stock continues to price in a turnaround that likely won’t happen. With this dynamic, it makes no sense to make a contrarian buy at today’s still-inflated price.

Shares Could Fall Further From Here

Bottom line: Under Armour stock is no “turnaround play.” The company’s poor management decisions sunk the company from high-flyer to has-been. The company lost its edge in performance wear. They show no signs of moving the needle in categories like athleisure.

Add in coronavirus headwinds, and what do you have? A stock that could fall further. Even after shares took a 50% haircut. 2020 guidance already implied tepid growth and earnings declines. Social distancing could mean even worse performance in the coming year.

Considering these factors, there’s no reason to buy Under Armour stock. In short, sell shares now, before they fall further.

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/moneywire/2020/03/bad-management-game-over-ua-stock/.

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