Under Armour Inc. (UAA) has seen it stock drop off drastically over the recent one-month period, caused by myriad factors centered around its slowing growth.
A brand once deemed the next Nike Inc. (NKE) disappointed investors in January with fourth-quarter earnings results that missed the consensus, along with weaker-than-expected 2017 forecasts. Wall Street sold off the sports apparel stock immediately after its Q4 miss, beating the stock down about 25% in one session. Sales growth slowed to 12% in the most recent quarter, dragged down by slower mall traffic and promotional activity challenges. Along with the earnings report, Under Armour announced a shakeup of its management team, in which Chief Financial Officer Chip Molloy resigned for unspecified reasons to be replaced by David Bergman, the current senior vice president of corporate finance.
CEO’s Trump Comments and ‘Reputational Risk’
To add to those issues, the Baltimore-based apparel brand’s CEO and founder, Kevin Plank, made complimentary remarks regarding President Donald Trump on CNBC’s “Fast Money Halftime Report” on Feb. 7 sparked immediate controversy. As the CEO said the president’s pro-business stance serves as “a real asset for this country,” many of Under Armour’s celebrity endorsers such as Steph Curry, Dwayne “The Rock” Johnson and Misty Copeland, went out and publicly mocked Plank.
Plank has come out aggressively to clarify his words and speak out against Trump’s seven-nation travel ban, even taking out a full-page ad in the Baltimore Sun. Despite his efforts, analysts have downgraded shares of the company on the basis of reputational risk, as costumers now perceive a pro-Trump CEO.
Industry research firm Susquehanna International Group says Plank’s comments make it “nearly impossible to effectively build a cool urban lifestyle brand in the foreseeable future.” Susquehanna’s Sam Poser slashed his price target on Under Armour’s shares in half to $14 while downgrading the stock to negative. As the company seeks to target Millennial and Generation Z cohorts, analysts warn against neglecting the value these groups place on business ethics and transparency. While the downgrade may seem drastic, industry expects note the particular vulnerability sports apparel players have to reputational risk, given the prominence of company logos on products.
Facing a Class-Action Lawsuit
As if Under Armour needed a cherry on top of its woes, shareholders have sued the company over a planned stock split. In a class-action lawsuit on Friday, Plank and Under Armour have been accused of intentionally misleading shareholders about the firm’s financial health.
“Despite outward votes of confidence and assurances to plaintiff and the rest of the investing public that Under Armour would continue as a force in the sports retail market, defendants—and Plank in particular—were aware of the decreasing growth margins and over surplus of unsold inventory,” said the lawsuit, which was filed in the U.S. District Court in Baltimore.
In comparison to peers Nike and Lululemon Athletica Inc. (LULU), Under Armour has failed where its rivals succeeded in grasping the high-growth segment between mass market and high-end. A crowded market facing competitive pressure from the likes of Adidas, drove Under Armour’s inventories up 17% on a year-over-year (YOY) basis in the most recent quarter.
In Q4, management said the firm’s basic staples performed poorly in a competitive environment, while the firm did not offer enough choices for fashion-conscious “athleisure” customers. Industry players are all targeting the athleisure in North America, a segment which grew at a rate of 12% in 2015, according to Fortune. Gaining traction in athleisure is critical for Under Armour’s future, as the segment comprises 80% of the company’s online sales. A successful online strategy is imperative as the traditional apparel market shifts to cope with a decline in mall traffic and a surge in e-commerce.
While Under Armour has posted more than 20% revenue growth over last 26 quarters, the firm has struggled with profitability more than its rivals, consistently posting lower operating margins compared to its peers. As the firm remains reliant on retail partners, Under Armour was forced to recently lower guidance when it lost its distribution network with a bankrupt Sports Authority. At a price-to-earnings ratio of approximately 48.6, Under Armour appears more expensive than rivals such as LULU at 32.3 and NKE at 25.6. Yet possible high growth opportunities could make UAA a worthwhile buy after its recent plummet.
Long-Term Growth Prospects
For one, Under Armour is hoping to continue building out its online presence in order to stay ahead of digital trends and reach the Millennial consumer. The firm has invested in mobile health apps and cutting-edge connected devices such as fitness trackers and smart shoes. To offset weakened North American sales, bulls foresee significant overseas prospects for the brand in emerging markets such as China, in which the middle class is expected to reach 600 million by 2022. In 2016, UAA’s international sales skyrocketed 63%, compared to 16% growth of its North American business.
The firm’s flourishing sneakers and women’s apparel businesses, both worth approximately $1 billion, should also carry Under Armour into 2017 if it succeeds in differentiating itself against other large-cap competitors without pressuring operating margins further by cutting prices too low. The company foresees revenue growth slowing to 11% to 12% in 2017. (See also: Why Adidas Has Been Beating Nike and Under Armour.)