The athletic apparel industry has left it behind, its share price has tanked in recent years, and Q1 was a disaster, but is Under Armour stock a good buy now?
On May 11, Under Armour (NYSE: UAA) reported yet another underwhelming quarter, which saw overall revenue for Q1 fall 23% to $930 million. This report sent Under Armour stock tumbling 15% on the day, and as of May 12, the company’s share price is down 60% year-on-year.
For many other companies, this disappointing performance could be attributed to the coronavirus pandemic, but Under Armour has been in turmoil for some time now, hitting new lows in mid-March from which it has not wholly recovered. Does this make Under Armour a good bargain stock to buy right now, or should this company be avoided?
The bull case for Under Armour
It’s a rare occasion that I struggle to find some bullish arguments for any company — even Virgin Galactic (NYSE: SPCE) has a bit more optimism going for it right now — but I really struggled with Under Armour. That doesn’t mean it’s got nothing going for it though.
This company was, at one point, the hottest name in sportswear. Nike (NYSE: NKE) and Adidas struggled to contain the young upstart and it experienced more than a decade of growth. It took several years of brand stagnation before the company finally replaced founder/CEO Kevin Plank with president and COO Patrick Frisk in January 2020. Frisk had grand intentions of dragging the company back to greatness in 2020, but unfortunately, the coronavirus hit, and these plans were scuppered. However, depending on how the company weathers this storm, it has a fresh new leader at the helm who is willing to drive it in a new direction, with a focus on e-commerce and rebranding for a younger audience again.
Another case for the company is that (coronavirus-related downturn aside) it is still bringing in over $1 billion in revenue every quarter. This big take is helped by the fact that the company is actually quite popular internationally, where roughly a quarter of its revenue comes from. Should the company focus on the success of its international market, much like rivals Nike and Skechers (NYSE: SKX), it could focus more efforts on building that success, and hopefully bring it back to its home market.
The bear case for Under Armour
Unfortunately for Under Armour, it need not look far to find bearish analysis of itself. When asked about UA back in February, ‘Mad Money’s’ Jim Cramer saw no reason to own it, stating that “maybe Nike is just too powerful”.
The problem is that Nike isn’t the only competition. The market has been dominated by Nike, Adidas, Reebok, and also includes Wall Street darling Lululemon (NYSE: LULU), which has seen its stock jump 245% over the past 5 years, versus the S&P 500’s (NYSEARCA: VOO) 36% in that period. Meanwhile, UA has fallen almost 80% in the same time frame.
Though the company has been cleared of criminal wrongdoing, there is still the issue of potentially fraudulent bookkeeping in recent years. Federal investigators are still probing as to whether the company shifted sales from quarter to quarter to appear healthier.
Under Armour’s biggest problem is that it is not popular with young people, a very important demographic. Revenues have been decreasing since 2017 due to falling North American sales, with more and more surveys showing that teens are increasingly viewing it as ‘unstylish’ or ‘old’. As growth continued to decline, the coronavirus then hit, resulting in a Q1 sales decline of 28% in North America. Even international sales fell 12%, largely due to the closure of stores in China. This led to a total revenue decrease of 23% to $930 million. UA was forced to withdraw its 2020 guidance due to the coronavirus back in April. With restructuring costs surpassing $500 billion and store layoffs occurring, UA is not dealing with the virus well.
It has still not fully grasped the rising need for e-commerce either, with the company claiming that online sales accounted for only ‘low double digits’ worth of revenue. As the world remains in lockdown and the likes of Amazon (NASDAQ: AMZN) and Shopify (NYSE: SHOP) thrive, earlier investment in e-commerce would have gone a long way.
So, should I buy Under Armour stock?
Right now, I don’t see any reason to buy Under Armour stock. As many before me have also said, there is a great company in there somewhere, but for some reason it’s just not showing itself. Under Armour continues to lag behind competitors, and its marketing to younger buyers has not proven fruitful. It is in the first year of a five-year recovery plan, but this has been thrown in the air due to the coronavirus.
I am not concerned about the longevity of Under Armour’s survival yet, but unless there is a drastic change in the company’s branding or popularity, I don’t see any growth in its future.
Quickfire round:
Under Armour does not currently pay a dividend.
The company may have fallen into a sizable rut, but it is far from going out of business.
Nike does not own Under Armour. In fact, Under Armour was probably Nike’s biggest competitive threat up until a few years ago.
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