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Why Struggling Under Armour Stock Hasn’t Rallied

Under Armour is in real trouble, which is why investors have skipped over UA stock

Under Armour (NYSE:UA, NYSE:UAA) looks exceptionally expensive. UA stock trades at 60x 2021 consensus earnings estimates. But in this case, that forward multiple is somewhat deceiving.

Under Armor (UA) logo in front of Under Armour store in Baltimore Harbor East
Source: AuKirk / Shutterstock.com

After all, the Street estimate for 2021 suggests net margins of a bit over 1%. And thanks to cost-cutting and, at some point, faster growth, Under Armour expects those margins to expand materially. If margins could rise just three percentage points, that alone would allow earnings to come close to quadrupling.

Put simply: UA stock can rally if Under Armour starts growing again.

Of course, few investors seem to believe that will actually happen. In a market that has gained sharply from March lows, Under Armour stock has seen only modest bounces, two of which have wound up reversing.

I’d expect the recent gains to fade as well. There simply isn’t any real reason to bet on an Under Armour turnaround. So while UA stock might not be as expensive as it looks, it’s still nowhere near cheap enough.

The Management Problem

Any turnaround case by definition requires trust in management. The whole point of a turnaround is that the business is underperforming, which makes the stock cheaper than it should be otherwise. As the business reaches its potential, the stock can rally in turn.

But it’s exceedingly difficult to trust Under Armour at this point. I’ve detailed its cultural problems in the past, which include a disappointing number of glaring ethical lapses. And I still hear from people inside the company that the environment remains toxic.

I’m not close to ready to believe that will change. Former chief executive officer Kevin Plank did step down last year. But he is still the company’s founder — and its chairman and “Brand Chief.” Founders rarely step away from their companies for good, no matter their title.

Plank no doubt still carries a lot of sway — and its under his leadership that the cultural problems surfaced. Under Armour needs to prove that they can be fixed, and it hasn’t done so yet.

A Lack of Growth

Whether it’s related to the culture or not, Under Armour isn’t executing well, either. The stock plunged 17% after fourth quarter earnings in mid-February, with the company’s 2020 guidance the key driver.

Under Armour projected that operating earnings would decline by roughly 50% year-over-year in 2020. And this was before the coronavirus started spreading in the U.S. At the time, the company only expected a revenue impact of roughly one percentage point.

Earnings disappointment isn’t a short-term problem, either. At an Investor Day back in 2018, Under Armour projected double-digit operating margins by 2023. Yet the original 2020 guidance suggested only about 2% of revenue would turn into operating profit.

So, on paper, UA stock can rally if the company expands margins. But the company has been promising that margin expansion for a few years now. Instead, profits are going backwards.

The key problem is that Under Armour products simply aren’t hitting the way they were. As a result, Under Armour is selling at retailers like Dick’s Sporting Goods (NYSE:DKS). No offense to Dick’s, but it’s a mass-market retailer that competes on price.

To get anywhere close to its margin targets, Under Armour needs to generate premium pricing, not push discounts. It needs to be something closer to Nike (NYSE:NKE) or Lululemon (NASDAQ:LULU) or adidas AG (OTCMKTS:ADDYY).

For some time, Under Armour was on the path to join that illustrious group. It’s why Under Armour stock at one point cleared $50. Quite clearly, the company has fallen off that path. I’m not ready to bet it’s going to get back on.

The Coronavirus Problem for UA Stock

At the very least, the novel coronavirus pandemic creates a significant problem for Under Armour. After all, even Nike is taking a big hit, with its fiscal fourth quarter revenue down 38% year-over-year.

The issue isn’t just that Under Armour is going to have a couple tough quarters. Nike is going to do the same, and I remain bullish on that stock.

Rather, the turnaround is going to be interrupted. It’s worth noting that Under Armour now is trying to get out of its sponsorship deal with the University of California, Los Angeles. The 15-year, $280 million agreement was the largest ever signed.

The move admittedly makes some sense. Under Armour is looking to preserve cash. It’s not getting bang for its proverbial buck at the moment, with college sports on hiatus.

But the effort to break the contract is a sign of a company that has to make decisions with a short-term focus. Nike isn’t looking to exit its deals. Nor is adidas. They can afford to take the long view.

Under Armour can’t. And that in turn means, at best, the hoped-for turnaround is going to be a few years away. In the meantime, Under Armour, and UA stock, are likely to deliver more of the same disappointment.

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/2020/07/why-struggling-ua-stock-hasnt-found-a-rally/.

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