When I looked at Under Armour Inc. (NYSE:UAA) a few months ago I told you to buy, buy, buy, and if you did you are now looking at a loss, loss, loss.
The stock is down almost 13% from my February 24 call. You have a right to ask where I went wrong.
The answer is that I underestimated the depth of the problems Under Armour now has in getting its merchandise into the hands of consumers.
When the company announced its March earnings last month, this became clear. There was a loss of $2.27 million, 1 cent per share, and revenue of $1.117 billion was up just 6% from the previous year’s $1.047 billion. The results spurred a small rally, but bears soon returned, as our Joseph Hargett noted, and our Laura Hoy says you should steer clear.
Fair enough. What would get Under Armour back on your buy list?
Where Do You Buy This Stuff?
The problems at Under Armour are in its sales channels.
Many of the sports retailers who once carried its clothes have gone under and the biggest chain standing, Dick’s Sporting Goods Inc (NYSE:DKS), is now selling its own Second Skin line, a store brand in UA’s “compression clothing” niche sure to add its own compression to UA margins.
Under Armour has sought to get around the block by signing a deal with Kohl’s Corporation (NYSE:KSS). But, sticking new gear in a department store people visit for discounts is not a good look for what has been a premium brand. And, Kohl’s sales are not making up the lost volume anyway.
Under Armour does run its own shops, but they are mostly in outlet malls. Rival Nike Inc (NYSE:NKE), meanwhile, has succeeded in getting full price in its department mall outlets, seen as destinations by customers. Under Armour is starting to copy this with its Brand House outlets in major cities, but risks having its shops seen as Microsoft Corporation (NASDAQ:MSFT) stores.
Under Armour has also copied Nike with its online shop. It, too, looks like a clone of the Nike operation, but it lacks one important category the Nike store emphasizes heavily: shoes.
What the Shoes Say
Under Armour is getting killed in shoes, despite being endorsed by the likes of Steph Curry and Dwayne “The Rock” Johnson. UAA is seen as an athletic performance line, not a lifestyle brand, one you wear if you’re serious about competing, not a brand you wear when you just want to look good.
The last time I looked seriously at Under Armour, in late April, I called this the “Apple way,” in homage to Apple Inc. (NASDAQ:AAPL), which only gets 10% of the smartphone market but all the profits. Clothes aren’t phones. The most profitable clothing line is also the one that sells the most. The mass market is where the profits lie.
It’s clear to me now that while the problems at Under Armour can be corrected, they are deeper than I first suspected, seeing the shares go on sale. The company’s stock split last year, designed to maintain founder-CEO Kevin Plank’s control of the company, but seems to have only made the man more arrogant, more firm in his belief that his “performance” way is the only path to success for the company.
The Mid-Life Crisis
Under Armour, it seems to me, is going through a mid-life crisis alongside its 44-year-old founder. Things could turn around, through deals like the one UAA made to outfit Major League Baseball starting in 2019.
But, Plank must find a way to make such expensive endorsements pay off, with a major focus on his distribution channels. If he can, then Richard Saintvilus is right and UAA stock is a buy. If Plank can’t get the distribution channels right, if the game has passed him by, even his ironclad grip on corporate power may not save him, or his shareholders, from disaster.
My guess is he will figure it out, but investors may want to see some evidence before putting in their buy orders. Under Armour is a bargain, but as Aaron Burr sang in the musical “Hamilton,” I’m willing to wait for it.
Dana Blankenhorn is a financial and technology journalist. He is the author of the political polemic Saving Trumpistan, Restoring Democracy, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AAPL and MSFT.
