For years and years, Under Armour (NYSE:UAA) stock has been the eyesore in a red-hot athletic apparel category.

Long story short, the athletic apparel brand has executed poorly against surging athleisure demand, failed to meaningfully grow sales and profits, and has ultimately seen its stock price fall into penny stock territory.

Meanwhile the likes of Nike (NYSE:NKE), Adidas (OTCMKTS:ADDYY), and Lululemon (NASDAQ:LULU) have all strongly capitalized on surging athleisure demand, reported stellar revenue and profit growth, and ultimately seen their stock prices soar to new highs.

It’s as stark a tale of two cities as you’ll find in the market.

But, there’s reason to believe that Under Armour is finally correcting course, and that a well-executed turnaround in 2021 could get UAA stock on the same winning trajectory as NKE stock, ADDYY stock, and LULU stock.

Of course, that means now is the time to buy UAA stock — while it’s still beaten up and ahead of this game-changing turnaround.

Here’s a deeper look.

Fixing Under Armour’s Branding Problem

For years, Under Armour has been plagued by a wide-reaching brand equity issue.

Specifically, Under Armour missed the athleisure trend back in 2015/16, fell behind peers who were killing it in athleisure, and tried to play catch-up by flooding lower-price channels with Under Armour product in an attempt to be the “affordable” brand in athletic apparel. That didn’t work. All it did was dilute brand equity because consumers started affiliating “Under Armour” with “cheap” and “uncool”. Sales, profits and the UAA stock price all fell off a cliff.

But, amid the novel coronavirus pandemic, Under Armour is finally fixing its huge, multi-year branding problem.

That is, the pandemic gave management the time to reassess the brand’s go-to market strategy, and they’ve come away with the right conclusion. In order for Under Armour to succeed in the long run, the company needs to improve brand equity, and stop selling so much product into off-price channels.

Throughout the second-quarter and third-quarter conference calls, management consistently talked about reducing brand exposure to the off-price channel and building out a more robust direct-to-consumer (DTC) sales channel, with premium product, at premium prices.

Those are the right moves to be making.

Getting UAA product out of Kohl’s (NYSE:KSS) and other off-price channels will help remove the negative stigmas that hamper Under Armour today. Building out a robust DTC channel will help Under Armour more strictly control, and thereby optimize, the shopping experience. Doing so will boost brand equity — which will in turn boost sales, profits and UAA stock.

After all, Nike pivoted aggressively to DTC, too, over the past few years. It’s worked wonders for them.

It should work wonders for Under Armour, too.

So Far, So Good

Under Armour’s recently reported third quarter numbers emphasize that this off-price channel reduction, premium-focused turnaround strategy is off to a great start.

The company’s Q3 numbers blew estimates out of the water, with revenues coming in flat year-over-year (versus expectations for a ~20% drop). Perhaps more impressively, international revenues — which were down almost 40% in Q2 — rose 17% in constant-currency in Q3, the best international revenue growth rate from Under Armour in over a year.

Meanwhile, gross margins came in well ahead of expectations. So did operating profits, and operating margins were roughly flat year-over-year despite Covid-19 noise. What was a huge operating loss last quarter, swung to a sizable profit this quarter.

Overall, the trends — rapidly recovering revenue growth, stabilizing margins, and losses turning into profits — broadly imply that Under Armour’s turnaround strategy is working.

It will continue to work in 2021, as a clean inventory slate coupled with new premium sales channels and premium products will converge on a rapidly improving apparel spending backdrop and easing Covid-19 hysteria. That’s a recipe which implies that Under Armour’s sales and profit trends next year should look really, really good.

Behind those strong growth trends, UAA stock should shoot higher in 2021.

Under Armour, Undervalued?

UAA stock is dirt cheap today because of the aforementioned branding problems.

But, if Under Armour can leverage a premium, DTC pivot and new, exciting products to fix those branding problems, then UAA stock today is too cheap for its own good.

That’s because management successfully pulling off this pivot will have two huge financial implications.

First, it will meaningfully accelerate revenue growth, from 3% to 4% today, to 5%-plus over the next few years. Second, it will meaningfully improve gross margins through a bigger mix of full-price sales and create visible runway for operating margins to scale to 10%.

If those two things happen – and I think they will – my modeling suggests that Under Armour will do about $1 in earnings per share by 2025.

Consumer discretionary stocks typically trade at 20-times forward earnings. Based on that multiple, a reasonable 2024 price target for UAA stock is $20. Discounted back by 8.5% per year, that implies a 2021 price target of nearly $16.

That’s about 15% above where share trade hands today.

Bottom Line on Under Armour Stock

For years, Under Armour has struggled with enormous branding problems.

In 2020, the company has taken significant steps to fix those branding problems.

In 2021, the company will start to realize the benefits of this enormous branding fix. Revenues will rebound meaningfully. Margins will expand. Profits will soar. So will the stock.

By the end of 2021, UAA stock will be closer to $20 than $10.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

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