At the moment, it’s easy to make a bear case for Under Armour. The performance apparel maker’s CEO, Patrik Frisk, stepped down from the company effective the start of this month with no permanent replacement lined up. Its stock got kicked out of the S&P 500 index this week, and it sits about a buck away from its all-time low. Nearly 12% of its stock is held by short-sellers betting Under Armour will fall further.
But to institutional investors, there is hope that the business made famous for its moisture-wicking sportswear may be turning around.
“A lot of the things that were done over the past few years were good—the work of a good mechanic who fixed a lot of things,” said Sam Poser, an equity analyst with Williams Trading, a Wall Street brokerage, in a phone call. “Now they have to find the right driver. And that’s going to take a little bit of time, and that’s going to take a little bit of work.”
One of the things the “mechanic” Frisk fixed was Under Armour’s huge expenditures on college sports sponsorship deals. Last decade, UA aggressively signed contracts with dozens of programs, including UCLA for $280 million and Notre Dame for at least $90 million, as it racked up massive sponsorship deals. At the peak in 2017, Under Armour had long-term sponsorship commitments of $1.36 billion. Wall Street hated the deals, at least in retrospect, given evidence brands don’t appear to get much, if any, lift from college athletics partnerships.
Today, after cutting loose programs from coast to coast, and picking high-profile fights with UCLA and California, Under Armour has reduced long-term sponsorship commitments to $288 million, most of which expire by the end of 2024—including a revised long-term deal with the University of Cincinnati. Under Armour declined to comment.
“I like the idea of cutting college and perhaps moving more toward pro athletes,” said CFRA equity analyst Zachary Warring in a phone call. “I don’t think college teams give you a lot of bang for your buck. … The brand is fine, and they brought on The Rock recently, and they have Steph Curry. And they need to do more of that to catch up to Nike.”
Pro athletes and clever placements can help Under Armour generate the excitement that competitors, mainly Nike, have been able to do with great effect, suggests Poser. “One of the things that surprised me was watching the NBA Finals. Steph Curry was wearing purple shoes, the Curry 4 Flotro. That was fun. Now are they going to sell a lot of purple shoes? I don’t know. But at least it was fun.”
So far, Under Armour’s not-so-fun efforts to trim costs and refocus the business appear have encouraged Wall Street’s analysts, with 13 rating Under Armour stock the equivalent of “buy,” another 11 giving neutral opinions and one saying “sell.” But positive analyst views don’t guarantee its problems are behind it.
For one, the recent removal from the S&P 500 creates share headwinds as institutional shareholders stop owning Under Armour stock. There are more than $13.5 trillion in assets that track the S&P 500, either directly indexed, like an ETF, or that use the S&P as a fund benchmark. In practice, the latter means funds generally own the S&P stocks and try to beat the index by owning more or less of its components. Under Armour’s two classes of shares fell about 20% this month after their S&P exile was announced. Its common stock, traded under the ticker UAA, closed Wednesday at $8.90—not far from its all-time low of $7.71 seen during the pandemic—and well below the post-pandemic high of $27 and all-time high of $54, set in 2015.
There also remains the specter of founder Kevin Plank, a dominant presence who so believed in his product starting out he’d send a Christmas card to Nike’s Phil Knight every year saying, “You will hear about us one day.” As executive chairman and majority holder of Under Armour’s voting power, Plank’s presence means the future CEO will have to accept not being the last word on strategy, something that could affect securing a top candidate.
Another hurdle is that the business seems bitten by bad luck or poor execution. Matthew Fitzpatrick stopped wearing Under Armour in February only to win the U.S. Open last week, with a Skechers logo on his cap where the Under Armour name used to be.
More seriously, Under Armour seemed to get hurt more than other companies by logistical snafus caused by the pandemic, meaning product arrived late to the U.S. and was often discounted, causing the company to miss earnings and income expectations for its latest reported quarter. A heavier presence in discounting retailers like Kohl’s means product gets sold for less and undercuts the premium performance wear image the company prefers. The latest misstep has undone sentiment that the company was executing on a 2020 restructuring plan to improve profitability and cash flow. Gross margin fell to 46.5% in the latest quarter, back below 2019 levels, and the company slipped to a net loss. Still, Under Armour pronounced the restructuring plan closed in its call with analysts.
“This is kind of the same story that I’ve heard over and over again from them: ‘We’re going through restructuring, we’re going to work on margins, and we’re going to improve this and we’re going to improve that,” said CFRA’s Warring, who rates the stock as “sell.” “And I’ve heard it over and over the last 10 years. And in reality, nothing has changed.”