I’m a pretty avid runner and gym goer, and I happen to love Under Armour (NYSE:UA, NYSE:UAA) gear for workouts. However, while I like the attire, UAA stock is another matter — and the company’s latest earnings report underscores that fact very succinctly.
Once the up-and-coming king of the fitness realm and apparent heir to Nike’s (NYSE:NKE) throne, Under Armour has turned cold. The innovation, pluckiness and attitude that made the brand the potential leader for both serious and causal athletes is gone.
In turn, this has continued to affect UAA stock in a big way. And it doesn’t look like it’ll be getting its mojo back anytime soon.
Accounting issues aside, Under Armour hasn’t really gotten back on the innovation train. From failed tech products and clothing not meeting athletes’ expectations, to the potential loss of a key endorser, Under Armour isn’t “protecting its house.” Nor is it protecting investor’s houses either. This is a huge problem, and shows how difficult it is for disruptors to keep the disruption going for the long haul.
Overall, Under Armour’s latest earnings highlights why it may not have what it takes to regain its former momentum.
Innovation, Not the Coronavirus, Is Hitting Under Armour
If you listen to Under Armour’s latest conference call, the coronavirus outbreak in China took center stage. New CEO Patrik Frisk mentioned that the outbreak could result in softer sales to the tune of $50 million to $60 million in the upcoming quarter. That’s a problem, and investors took shares of UAA stock to the woodshed when it reported. However, the real issue comes down to innovation — or the lack of it — in the near term.
Under Armour gained fame when it created the first moisture-wicking apparel for the sports industry. Founder, Executive Officer and Brand Chief Kevin Plank basically designed the original shirt that wicked perspiration off the skin. That one product set the gears in the motion and made Under Armour — and UAA stock — one of the fastest growers in the sports apparel segment; Even Nike was hit off-guard by the change.
However, these days, that key product has become sort of a commodity. Nike, Adidas (OTCMKTS:ADDYY) and Hanes Brand’s (NYSE:HBI) Champion now all offer similar products for athletes. Heck, the fabric and idea has become such a commodity that even Dick’s Sporting Goods (NYSE:DKS) and Amazon (NASDAQ:AMZN) now offer moisture-wicking gear aimed at the weekend warrior and causal athlete. And, the price points are about a third of Under Armour’s basic tech tees.
In turn, this has resulted in softer demand and sales — and that’s continued in the latest quarter as well. While the firm did see a slight increase in revenues last quarter by 4%, analysts had been expecting 6% growth. However, these estimates were already reduced heading into the announcement. Furthermore, looking at the full-year picture, Under Armour only realized a 1% gain in total revenues.
So, this is why it is sort of easy to see the lost momentum. Athletes, both causal and professional, aren’t choosing the brands products; Or, at least, not its latest innovative ones.
Consumers aren’t flocking to the firm’s latest product offerings, such as its new mineral-infused UA Rush line of workout gear. You can tell because some of the new products are already showing discounts on Under Armour’s Outlet side of its website. This is the similar fate for a variety of product lines, such as its Recover after-work gear and even its digital offerings like the MyFitnessPal app. Under Armour’s direct-to-consumer revenue (DTC) — which includes digital sources — once again slipped for the quarter. Compare this to Nike and Adidas, which both saw DTC revenue jump by double digits. In fact, Nike saw its digital revenues surge by 38% in its last reported quarter.
On top of this, Under Armour is seemingly having difficulties with its key athlete sponsorship deals. As reported by the New York Times, Golden State Warriors star and lead athlete endorser Stephen Curry has been having some high-profile spats with Under Armour and its management, while the Rock’s line of Under Armour gear has also hit the discount racks on lower demand.
Under Armour Has a Big Task Ahead
For Under Armour, this all a huge deal and its caught between a rock and a hard place. On one hand, low price rivals have forced it discount its most basic gear as moisture wicking is commoditized.
Secondly, consumers aren’t seeing the value in buying the premium goods either. They are simply flocking to other firms like Nike, Lululemon Athletica (NASDAQ:LULU) or the even the Gap’s (NYSE:GPS) Athleta brand for their needs. Collectively, Under Armour hasn’t been able to generate any serious buzz for its latest round of product innovation.
The company is just caught in the middle. Consumers don’t know what to make of the firm’s gear, and that’s not great for UAA stock. As a result, this uncertainty about the brand is causing Under Armour to reduce its full-year 2020 revenue by a full percentage point to the low-single-digits. Meanwhile, it expects a whopping $325 million to $425 million in pre-tax charges this year as it undergoes various restructuring efforts throughout the year.
None of this is great for investors. And the reality is that Under Armour needs to get back to innovating and giving people a reason to consider the brand.
Buy The Gear, Skip UAA Stock
Overall, I’m not sure that it can. It seems that Under Armour may have missed the boat when it comes to positioning itself for the future. Lululemon seems to have no trouble selling $100 yoga pants, while Nike continues to gather both serious and causal athletes to its mix of products. Under Armour simply doesn’t have a direction, so no wonder why the stock plunged 14% when it announced earnings.
In the end, the company does make some good stuff. However, it’ll be a challenge to get the public to buy it for a premium price. And that doesn’t exactly make UAA stock a big buy.
So when it comes to athlete apparel makers, there are other firms still getting it right and the transition at Under Armour will be a rocky one at best.
At the time of writing, Aaron Levitt did not own any of the stocks mentioned.