Under Armour Inc. (UA, Financial) (UAA, Financial) specializes in producing athletic and performance apparel, footwear and accessories. The company was founded in 1996 by Kevin Plank, a former college football player who recognized the need for moisture-absorbing, compression apparel for athletes. In fact, the company’s first product was a t-shirt made from a fabric that drew sweat away from the skin, keeping athletes cool and dry during workouts. It was a huge innovation!
The company was supposed to be a real competitor to Nike Inc. (NKE, Financial) and Adidas AG (XTER:ADS, Financial). At one point during the last decade, it looked like it could be on the way to doing just that. In 2015, the stock was trading at $50 a share with roughly a $20 billion market capitalization. Today, the company has an enterprise value of $4.8 billion, including $850 million in cash and $1.50 billion in debt. Despite having $5.6 billion in revenue with gross margins of 44%, it has been struggling to consistently produce operating income. Now, it looks like a mid-tier athletics apparel manufacture.
Financial unpacking
Under Armour is such a disappointment because of what seems like financial self-sabotage. In 2013, the company generated $2.3 billion on the top line, paid $869 million in selling, general and administrative expenses, which was and still is the company’s only operating expense on the income statement. Net income in 2013 was $265 million. In the last 12 months, Under Armour's losses amounted to $121 million on north of $5.3 billion in sales. It actually has better gross margins today than it had 10 years ago, but while revenue is up 127%, the company’s operating expenses, again all SG&A costs, are up 170%. This has been a problem with inventory piling up and now Under Armour’s revenue is expected to be in the $5.85 billion range for its latest fiscal year.
On the revenue side, Under Armour gets 70% of its sales from apparel and roughly 25% from footwear. The company employs 7,100 people, who each generate over $818,000 a year on the top line at a cost of roughly $88,000 per employee per year. That is not where the problem lies. While Under Armour has continued to grow revenue faster than Nike, it has yet to consistently turn income into higher retained earnings. In fact, since the stock’s peak in 2015, the company’s retained earnings have actually shrunk. It is not hard to explain why the stock is also down 75% since then.
Under Armour has encountered difficulties in both its direct-to-consumer and wholesale operations. Although its direct-to-consumer sales have increased from $1.5 billion to $2.3 billion in the last six years, its competitors have experienced much more significant growth in this area. As wholesale distribution has slowed, the company has established its own stores, but a majority of them are off-price and Under Armour is expected to increase its direct-to-consumer revenue to 49% of its total revenue by fiscal 2032. If the company’s revenue is $10 billion, that’s nearly $5 billion in a segment that produces better margins and greater control.
Supply and demand
Under Armour continues to struggle with creating high demand for its products. Two of the most famous brand ambassadors are Tom Brady and Michael Phelps, both of whom are retired and neither of which are going to appeal to teenagers and young adults. In basketball, the company has Joel Embiid and Steph Curry. In soccer, it is represented by Liverpool defender Trent Alexander-Arnold. As for Formula 1, the company has Mick Schumacher, son of the great Michael Schumacher, who dominated racing in the early 2000s.
The point is, Under Armour needs more well-known athletes to build a stronger brand, but it is not getting them. So it is not able to charge premium prices like Nike and Adidas and is left competing with New Balance and upstarts like On Running. For example, at Foot Locker (FL, Financial) here in DC, nearly all the men’s basketball shoes that retail for more than $120 are Nike or Adidas.
New chief executive
In December, Under Armour announced Stephanie Linnartz would be stepping into the role of president and CEO starting Feb. 27.
Linnartz spent more than 25 years with Marriot International (MAR, Financial), moving up the ranks, overhauling the hospitality company’s online presence and expanding its industry-leading Bonvoy loyalty program to over 173 million members. She also cultivated the hotel chain’s partnerships with the NFL and NCAA.
In the two years prior to joining Under Armour, she served as president of the company. If Anthony Capuano did not get the CEO job back in 2021, she would likely be in that role instead of running Under Armour. It was an odd choice for an athletic apparel manufacture to tap a hospitality veteran to lead the next phase of its journey. However, maybe that is what works. When Nike changed the top job, it at least picked a leader with CEO and chairman-level experience. But, to be fair, this is the least of the company’s worries.
In past years, instead of focusing on its brand, Under Armour tried to connect technology and fitness. In 2013, Under Armour acquired MapMyFitness for $150 million. Two years later, it acquired social fitness apps MyFitnessPal and Europe’s Endomondo for a combined $560 million. The company had a vision of using these apps to build a wearable business, but this strategy was abandoned in 2017. By 2020, Under Armour had sold MyFitnessPal and shuttered Endomondo. With that in mind, I do believe that Linnartz will stay on the mission of selling shoes and apparel.
The bottom line
Under Armour is a value trap. Not only is the company a mid-level product maker at best, but it is no longer the growth story it once was. The market is placing too high a multiple (15 times forward earnings) on the stock. I think the market has rose-colored glasses to think that Under Armour will be able to grow earnings at double-digit rates, which is what analysts predict over the next few years. At one point, I really thought this company was going to be a winner. Now, investors should wait and see for the time being.
