Under Armour Is Cheap For All The Right Reasons (NYSE:UA)

Sometimes I wonder what goes through an elite athletes’ mind when they return to the scene of past glory. Surely when Tiger Woods shows up to Augusta in the spring – it feels different. Right?

While I’ll never win a green jacket playing golf, if they handed them out for Under Armour (NYSE:UA) (NYSE:UAA) stock analysis – I’d have a few.

In August 2016, Under Armour stock was trading around $40 per share when I penned the article titled The Race Under Armour Will Lose. Reading the article back – and the 240+ comments is almost surreal. Credit to the Seeking Alpha editors for allowing me to publish analysis that contained no actual financial data … but did accurately predict why Under Armour’s once high-flying stock would fall off a cliff.

Later in 2016, I highlighted how Under Armour foolishly blew nearly $1 Billion on fitness apps in the article Under Armour’s Billion Dollar Blunder. A few years later the company either sold or shuttered most of its app business units.

Finally, in 2020 I wrote Under Armour Won’t Stage A Comeback. Since writing that, Under Armour stock is up about 2%. The S&P 500 is up over 40% and Nike (NKE), the stock I recommended buying instead of Under Armour, is up over 40%.

Now despite all this success analyzing why Under Armour’s stock would underperform – I’ve actually spent quite a bit of time trying to like the stock.

Value Stock?

You see, the stock isn’t exactly expensive from a valuation perspective. At a $5B valuation with slightly more than that in TTM revenue, an investor is not paying a huge multiple on sales.

However, the mistake an investor could make is confusing Under Armour as a value stock – when it’s actually a value trap. Let’s dive into the financials to get a good picture of where Under Armour is today.

	2022	2021	% Change
Revenue	$2.9B	$2.9B	0%
Gross Margin	46%	50.3%	-8.5%
Operating Income	$154M	$293M	-47.4M
Operating Cash Flow	-2.5M	$380M	-100%

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Data: Under Armour Through 6 Months Ended September 30

Every key financial metric for Under Armour is in decline. Margins, operating income, operating cash flow are all falling like a rock.

If Under Armour could drive top-line sales growth, it could mask the issue of declining margins and profits. But that’s not what the company is projecting will happen.

On the latest quarterly update the company actually lowered revenue guidance from 5-7% growth down to low single digit growth.

Wall Street analysts aren’t projecting a revenue surge either (and who would considering the macro backdrop) with Under Armour revenue estimates seen between $1.4B-$1.69B until 2025.

So it’s unlikely Under Armour is bailed out with a surge in sales. The company will need to expand operating margins. In the apparel business you do that by raising demand and selling the product directly to the consumer.

Let’s address the direct to consumer sales channel first. Under Armour is actually seeing less demand for its product direct to consumer. Here are the DTC revenue figures over the past six months.

2022	2021	Change
1,097,940	1,164,365	-5.7%

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Having declining DTC net sales isn’t a fashion industry or macro environment issue for Under Armour. Nike’s most recent quarterly DTC sales were up 25%.

Demand Creation

The problem with Under Armour today is exactly the same as it was in 2016. The brand doesn’t appeal to a wide enough audience. Period.

The suburban dad and soccer mom will find the brand appealing for trips to the gym or for the kids. But the hip and fashionable crowd is not wearing Under Armour.

As odd as it may seem, if you don’t see a brand being worn by popular musicians, or in this era, popular “influencers” on social media – the brand isn’t going to reach the crowd that actually makes it cool.

Investors mocked me in the comments of my 2016 article when I went to shopping malls to see if people were wearing Under Armour – now you just need to surf Instagram (META) and TikTok.

Does Nike pay Justin Bieber to wear its shoes and post pictures of him wearing them? I don’t know. But the post was liked over 3.1M times and likely seen by millions more.

Kylie Jenner also has one of the most followed accounts on Instagram. It too wasn’t a challenge to find a post with Nike being front and center.

Now Kylie Jenner is in a relationship and has children with Travis Scott, who does have an endorsement deal with Nike. However it underscores another example of how Nike not only partners with the top athletes – but also key entertainment figures.

Some investors will mock going to a shopping mall or perusing social media to see what kids half our age (or more) are wearing – but that’s fashion.

Have your brand popping up in the most popular social media accounts and you can trade 40x forward earnings and 4x sales like Nike.

Yes, Under Armour has social influence through Stephen Curry, Tom Brady and more importantly Dwyane “The Rock” Johnson. But Nike has LeBron James, Cristiano Ronaldo, Tiger Woods, Michael Jordan and countless others too.

Unless Under Armour crosses over into mainstream fashion like Nike, the brand isn’t going to be able to charge a premium price – and achieve a premium multiple from investors.

New CEO

Can the new CEO change things at Under Armour? It’s possible a lifetime hotel executive knows more about fashion than it may seem – but I’m skeptical.

If Under Armour, or more importantly founder and former CEO Kevin Plank, wanted to bring in a CEO who has fashion experience the company certainly could have. The list of current or former Nike and Adidas executives who would take a shot at being CEO at Under Armour is likely long … let alone a candidate from another fashion brand.

What’s more likely is Kevin Plank doesn’t actually want to bring on someone who will dramatically take the reins of Under Armour and change his idea of what the brand should be. That’s why you hire a hotel executive with no previous experience selling and marketing apparel.

However, it’s too early to judge incoming CEO Stephanie Linnartz. It’s not like Nike hired a fashion guru last time it changed leadership. Where I’ll be looking to see if Ms. Linnartz has any chance of turning this brand around will actually be the marketing.

If I see an Under Armour ad that gets $160M in media coverage, or wins Emmy Awards – like Nike ads routinely do … I’ll buy Under Armour stock immediately. Does incoming CEO Stephanie Linnartz have that ability? I don’t know. One thing is for sure, she won’t have a $1B budget at a single ad agency to help.

Conclusions

Under Armour is not overvalued like it was back in 2016. But the recipe for success is the same. In order for the stock to regain a premium multiple, it has to cross over into mainstream fashion. That requires slick and timely marketing; along with partnering with key influencers, athletes and musicians. Kevin Plank has proven he can only accomplish parts of this for brief periods of time. I’m not confidant a hotel executive brought in to be CEO will be able to do much better. I’d rather own Nike and continue to hold the shares I owned back in 2016.