Over the past several years years, Under Armour Inc. (UA, Financial)(UAA, Financial) has faced scrutiny over questionable leadership actions, but that was not the only thing that went wrong for the company. It continued to lose popularity among teenagers - the biggest target market for the company’s products. Adding salt to the wound, a few company executives came under pressure for misbehavior as well. The company even had to pay a $9 million fine to settle an SEC probe in which a watchdog claimed Under Armour misled investors by inflating sales in 2015 and 2016.
All these challenges deteriorated the investor sentiment toward Under Armour stock. The company has lost nearly 28% of its market value in the last five years, which does not come as a surprise.
Founded in 1996, Under Armour is a leading inventor, marketer and distributor of branded athletic apparel, footwear and accessories. Its products are sold through wholesale channels such as national and regional sporting goods chains, independent and specialty retailers, department store chains, mono-branded Under Armour retail stores, institutional athletic departments, as well as independent distributors and directly to consumers. As of last year, the company owned 324 total factory houses and 98 brand houses.
Overcoming adversity
So far this year, the prices of fashion retail stocks have regained some momentum due to several positive developments, such as the surge in online orders, an increase in demand for comfortable and functional clothing and workout-related apparel as people start stepping outside their homes to work out. Some players in the industry, such as Nike Inc. (NKE, Financial) and Lululemon Athletica Inc. (LULU, Financial), are already trading above the stock prices seen in 2019, but Under Armour has yet to recover to pre-pandemic levels due to company-specific challenges.
Since his appointment in 2020, CEO Patrik Frisk has introduced several initiatives to steer Under Armour in the right direction. Changes were made so the portfolio was more favorably streamlined to deliver better profitability. Net revenue, which marginally grew to $5.3 billion in 2019, dropped to $4.5 billion in 2020. In 2021, the company reported revenue of $5.68 billion, a new high. The gross margin improved to 50.4% in 2021 from 48.6% in 2020 and 49.9% in 2019. Operating income also reached a record high of $525 million last year, a massive improvement from $236.8 million reported in 2019. These numbers suggest Under Armour has well and truly recovered from the pandemic from a financial performance perspective, but its market value has yet to reflect this reality.
Under Armour bought MapMyFitness in 2013 for $150 million, followed by Endomondo for $85 million and MyFitnessPal for $475 million in 2015. The acquisitions of the fitness and health-focused apps and technology were the company's commitment to expanding its digital offerings. Additionally, these investments came in handy during the pandemic as mobility restrictions forced people to remain indoors.
Over the last several years, Under Armour has been laser-focused on keeping operating costs down, and these efforts are now beginning to reflect positively in its numbers. The company has also embraced the reality that lifestyle trends need to be followed to regain its footing as a popular brand among teenagers. To this end, Under Armour has introduced several product lines to reignite growth. All in all, the company has come out of the recent recession as a financially stronger, growth-focused company.
Improved balance sheet
In the fourth quarter of 2021, Under Armour generated $600 million in cash to end the year with $1.7 billion, which is the highest historical level achieved by the company. Under Armour was also able to reduce its total liabilities by $452 million in the last year. In addition, the cost-saving measures the company introduced paint a promising picture of what the future holds for Under Armour.
The international segment has room to grow
North America accounts for the majority of Under Armour’s sales today, but the growth in Asia is quite exciting. The brand might not have as big a presence as Nike or Adidas AG (ADDYY, Financial), but Under Armour is growing quickly in the Asian-Pacific region, with revenue from this segment improving 32% from last year. As a percentage of net revenue, the Asia-Pacific segment now accounts for 15%, an improvement of 100 basis points from the previous year. With disposable income rising in many Asian countries, including populous nations such as India, Pakistan, Bangladesh and Malaysia, Under Armour and other athletic apparel companies are likely to see strong demand for their products in this region in the future. The younger generations in these countries are focused on improving their health as well, which is another reason to be optimistic about the prospects for Under Armour internationally.
Relatively undervalued
Nike and Lululemon Athletica are two close rivals of Under Armour that enjoy greater investor confidence, which is evident from the rich valuation multiples attached to these companies. Nike is valued at a forward price-earnings ratio of 33.58, while Lululemon trades at 38 times next year's expected earnings. In contrast, Under Armour trades at just 21 times forward earnings. This valuation discount is probably resulting from Under Armour’s struggles in the last five years, but today it is in much better shape to grow. As is often the case, the market has yet to react positively to the progress Under Armour has made, which presents a potentially good value opportunity for investors.
Takeaway
Under Armour is moving in the right direction, but investors seem to be cautious because of its lackluster track record. The company is executing its turnaround strategy commendably, but it could be a matter of time until the market appreciates the progress it has made in overcoming both internal and external challenges.
