Under Armour, Under Pressure

Under Amour crashed over 15% after their earnings report on OCT 2016 down to $30 per share… Then on Jan 2017, it reported a second straight quarter of sales lower than anticipated. UA stock is steadily declining to $19-20 per share (4/9/2017). Under Armour is facing challenging sales growth and public relations challenges.

Team UA
Under Armour Sponsored Athletes

UA sponsors some of the biggest names in the industry, including Stephen Curry, Tom Brady, Micheal Phelps, Bryce Harper, Jordan Spieth, Cam Newton, Clayton Kershaw, Lindsey Vonn, Misty Copeland, and many more. Major League Baseball also struck a deal with Under Armour to supply the league uniforms beginning in 2020. UA has one of the best brand ambassadors with MVP recognition from Football, Baseball, Basketball, Swimming, and Golf. The Sponsored athletes are making UA brand relevant as Michael Jordan made Nike relevant in the 90s.

A month ago, Under Armour CEO, Kevin expressed his favorable political views on President Trump, but Stephen Curry, Under Armour top sponsored athlete did not partake the same sentiment about Trump.  Referable to the current political climate, Consumers already have pledged to boycott companies that support Trump. When can we expect Under Armour problems to reset, and refocus itself to become a better company?

What happened to UA?

Under Armour was worth more than $20 billion in 2015 and surpassed Adidas to become the #2 sportswear brand in the U.S. But it rapidly ran into problems that were caused by bad strategic choices.
In the past few years, they have created some critical mistakes investing over $710 Million on fitness apps, and over $100M on R&D for gimmicky tech products like weight scales that provided no value.
1. $150 million for MapMyFitness in 2013
2. $85 million for Endomondo
3. $475 million for MyFitnessPal, both in 2015.

Is Under Armour a digital health, tech or an apparel company?

One of their biggest strategy announcement in recent time was selling more clothes at Khols, which will temporarily add revenue, but it will KILL the BRAND. Do we see any Lulu stuff in Khols? It made a half-ass attempt on Athleisure and said they are departing to focus on PERFORMANCE apparel, it sounds as gimmicky as their tech strategy.

Business Profile
UA expanded their business and signed multiple famous athletes like Tom Brady, Steph Curry, Bryce Harper, and Jordan Spieth. Most of these athletes are MVP or very recognizable athletes in their sport. In recent years, Under Armour stock the market, but it still has all the winning traits to become a great stock to win in the long-run.

UA’s brand identity uses a combination of strategies:
1) On-field authenticity with professional athletes and teams that use its brand and marketing
2) Brand-building activities that position Under Armour as an authentic lifestyle brand with the broader consumer market of active lifestyle consumers, where we think it is beginning to make inroads. 

Supporting UA’s penetration into the sports apparel market is their investments in direct to-consumer business (e-commerce, catalogs, less than two dozen retail stores, and 143 factory outlet stores in North America at the end of 2015), expansion of domestic and international wholesale distribution, and adjacent products. UA offers a wide range of products, including performance training, cleats, running and basketball shoes. The company’s accessories include baseball, football, golf and running gloves incorporating HeatGear and ColdGear technologies, as well as socks, mouth guards and eyewear developed by licensees

UA has 4 product categories: Apparel, Footwear, Accessories, and Licensing all product category has grown 10%+

UA Revenue Distribution: UA’s penetration of the active use sports apparel market is being supported by investments in its direct-to-consumer business (e-commerce, catalogs, less than two dozen retail stores, and 143 factory outlet stores in North America at the end of 2015), expansion of domestic and international wholesale distribution, and product adjacencies.

Can it continue 2016 Growth or will it decline?
As Uncle Ben would say to Peter Parker’s business ‘ With great growth, comes great responsibility to shareholders’. When UA signed Steph Curry to Under Armour, it helped propel UA basketball sales to compete directly against Nike signature shoe brands like LeBron and Kobe. Investors became over enthusiastic about the sales growth and valuation high as 80x P/E between 2014 & 2015.

From 2012-2016 UA CAGR growth was 27%, but the company has reported a trend of declining earnings per share over the past two years. There was a 60% revenue growth in countries like the UK, China, and Germany. In recent earnings, management has lowered its 2017 revenue forecast for 10%-12% growth. UA still has great brands, profitable products, and revenues over 10% a year, but the stock went down ~50% in valuation. Investors are left to once again marvel and question of the power of the Under Armour brand, made famous by catchy commercials, and famous sponsored athletes.

Valuation $24 Per Share
Revenue expected to grow 10  to 12 percent to reach nearly $5.4 billion
Gross margin expected to be slightly down compared to 46.4% in 2016 with benefits in product costs being offset by changes in foreign currency and shifts in the overall sales mix, as the footwear and international businesses continue to outpace the growth of the higher margin apparel and North American businesses;

  • Operating income expected to reach approximately $320 million
  • Effective tax rate of 30 percent
  • EBITDA – 10 to 12%
  • Growth: Assuming UA can maintain the same growth rate of 10-15% for the next 5 years, then the fair price is a 15% to 20% upside.
    • Shoes sales drive by basketball shoes
    • International expansion
    • Direct Revenue from E-commerce
    • Increase sales from Woman’s apparel
    • Supply chain improvements

1. Macro – a slowdown in spending on discretionary

2. Distribution problems – Large chains such as Dick’s and footlockers are still expanding their Under Armour assortment. The business partnership has to grow and the logistic operations need to stay lean to keep operating cost low.

3. Direct to consumer problems – While the direct-to-consumer business appears to be enhancing returns, it carries higher risks through markdowns and operating leverage, and requires ongoing investment in stores, websites, marketing, and customer service.

4. Brand dilution – UA is selling at Khols, and discounting products too often. Clearance of excess product through outlet stores

5. Confusing Strategy and Overpaying for Apps and hardware – using a majority of its cash and resources to launching a digital health service and gimmicky tech products. Under Armour culture and talent is not known for health or tech.

Published by

Agarwood Capital

AgarWood Capital is an investment firm built on fundamental research that invests in value-growth equity securities. We filter out the market noise to identify undervalued opportunities, isolate quantifiable data, and then implement ideas. Our focus is research-driven with practical insights powered by academic and market research that invest in tailwind businesses.

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