Is Under Armor Stock a Buy?

Once upon a time, Under protection (NYSE: UA) (NYSE: UAA) was the rising star of the sportswear industry. The company had an enviable brand and revenue growth to support that. Then a series of missteps and growing competition weighed on his game.

On this clip of Motley Fool Live registered on February 10, “The Wrap” host Jason Hall, Fool analyst Nick Sciple and contributor Danny Vena discuss Under Armor and what the future holds for this promising former upstart.

Jason Hall: So Under Armor is the, I guess at this point you could say besieged. Because it was a hot business for a decade. It was one of the most successful and popular in the Mad Universe. The company was increasing its turnover by 20% per quarter. I think they cultivated it for about 220 quarters in a row. It was just like this mad rush. Maybe it wasn’t that much, it was like 50 quarters in a row anyway. It was 12, 13, something like that. So it’s a very long period of quarter-to-quarter growth. Then only the wheels came off.

Danny Vena: The wheels came off.

Jason Hall: They really did. Is just [laughs] like if it gets to a certain level of scale and gets bloated and the growth has slowed down and the competition has turned fierce in the United States, then you’ve seen a retail apocalypse. You saw a lot of athletics [retailers], Sports Authority was one. A few of those other sports retailers that were big distributors went bankrupt.

I have the impression that the company understood as if they had signed the agreement with Kohl’s (NYSE: KSS) as a distributor to replace some of that. Kohl’s is a discount right there. I mean, they ain’t like [The TJX Companies (NYSE:TJX)] TJ Maxx here, but it’s a discount retailer, so it hasn’t been good.

But then the company announced that it had made some changes. They brought in a new CEO. Plank, their founder, has been pushed back a bit and it looks like this new CEO is taking a few steps. So stocks jumped in earnings today, although earnings continued to decline in the US, and here is the result. The reason revenues have improved is because margins have improved, and the company said we will further reduce our business footprint. We will focus on profitability.

Looks like they’re trying to reclaim the brand as a premium brand, and they’re going to focus on their own stores. They will focus on e-commerce. Here is what I want to do. I really do an introspection. I think maybe I sold too early. I sold at the end of last year. I thought it was a weed. I cut my weeds here. I want you to do a little over here. Do you want to start, Danny? I’ll let you go first on this one, since Nick went first and last. More or less on Under Armor outperforming the market over the next five years.

Danny Vena: I look a lot like you, although I had less patience than you. I sold my Under Armor shares several years ago. I think it was around the time they made Kevin Plank, or not Kevin Plank. Anyway, they signed a great basketball player. I didn’t like the way the metrics were going, everything was going in the wrong direction, and instead of looking into e-commerce and expanding e-commerce, they expanded more into physical retail, and I thought, “Well, this is a recipe for destruction. Why would you do this? All the data shows that customers are increasingly relying on e-commerce and the business has taken the opposite direction.

It was a wake-up call to me, so I jumped on it. I would say overall I’ll always go with less. I don’t think they’ve turned the boat around yet, I don’t think they looked at e-commerce the way they needed it when they needed it, so I’ll say below.

Jason Hall: Nick, what are you thinking here?

Nick Sciple: I’ll say sub too, maybe for a slightly different reason than Danny’s. I would just say, remember, David Gardner has an instant test. If you snapped your fingers and the business disappeared, would you notice? I don’t think Under Armor passes the instant test anymore.

I don’t mind the emphasis on brick and mortar or the way they emphasize that. I think it’s like that lululemon (NASDAQ: LULU) treated their store to be brick and mortar, I think it was a big differentiator for them and helped them build their brand. I think when I think of Lululemon that’s what Under Armor should have become. Under Armor made some strategic missteps, and if they had followed a very similar pattern to what Lululemon had done, maybe the story is different. But I don’t think Under Armor passes the instant test. If I’m going to invest in this kind of active leisure wear, I’m not sure why I would own Under Armor instead of Lululemon.

Jason Hall: I tend to fall into the same camp. I think ultimately, yes, it continues to grow at low double-digit rates internationally. It’s just so far behind the brand’s appeal for Nike (NYSE: NKE). Nike has just proven itself to be this incredibly sustainable brand. You start to think about soccer – soccer – soccer outside the United States Adidas (OTC: ADDYY) is another very successful brand. You think of hobbies where Puma is more interesting than Under Armor.

There are people who are hardcore sneaker guys who are going to buy, what is the basketball player, the three point guy from Golden State …

Nick Sciple: Stephen Curry.

Jason Hall: Yes. They’re going to buy Steph Curry’s new shoe. They will buy it. But they also go [laughs] to spend some $ 100 on Lebron James’ new Nike. They will do it. I just don’t think it’s a big enough addressable market, and I think they’re going to continue to have a good small business. I think they will improve their margins. But I don’t think they’re ever going to get operating leverage, because I don’t think they’re ever going to be big enough for that operating leverage to be an investment that beats the market. Yes. I will choose the below here too. I am really.

Nick Sciple: You don’t think that Galactic Virgo will the space suit market really kick off this next stage of growth?

Jason Hall: [laughs] It’s fantastic.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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