Why Have We Revised Our Price For Under Armour Downwards?

Under Armour (NYSE:UA) has had it pretty rough this year. The company, which was once pegged to be the next Nike, has seen significant drops in its top and bottom lines over the past few quarters. Revenues were hurt on weaker North American demand spurred on by changing consumer trends. Due to the slowing demand, Under Armour was forced to sell off most of its mounting inventory at discounted prices. This affected the margins throughout the year. We expect this trend to continue into 2018 as well, leading to our price revision.

• As mentioned above, the North American market has been hit hard over the last few quarters on sluggish demand that has weighed consistently on the top line, leading to a severe build-up in inventory. To clear out this build up in stock, management resorted to selling products at discounted prices and offering higher promotions than usual through some of their busiest seasons. Both strategies hurt the company’s financials significantly, forcing management to cut their full-year earnings per share guidance in half.
• Connected Fitness continued to remain a burden for the company throughout the year. The business generated less than 2% of the total revenues during the first nine months of 2017.
  • While the company continued to record heavy increases in users across its platform, the segment consistently recorded losses over the period. This was primarily because the company’s digital ecosystem was heavily fragmented. Many of the users only tried out the free versions of the apps instead of the paid ones with premium features.
  • Further, combining this business with a growing inventory of hardware products like HealthBox – which the company has decided to consequently discontinue going forward – has helped create a very undesirable position for the company, at a time when even market leaders like Fitbit are struggling to make ends meet.
  • Given the way things are, the future of Connected Fitness, which was supposed to help be the main differentiating factor between Under Armour and its competitors, seems quite uncertain.
• Footwear, which was once the company’s crown jewel, threatening the likes of Nike and Adidas, suffered notably in the year. After recording several quarters of heavy growth thanks to the success of its Steph Curry line of shoes, Under Armour witnessed the segment take a heavy hit on the unpopularity of the Curry 3. Additionally, the Curry 4 was pushed back by a few weeks on delays. In this respect, the company was forced to let Peter Ruppe, the head of the footwear segment, go.

That said, Under Armour has really tried to turn things around. CEO Kevin Plank decided to initiate a restructuring strategy (“a pivot”) in the year that will require the termination of some of the company’s global workforce, while probably shedding some of its least profitable businesses. Hopefully, 2018 will paint a different story. But until then, investors may continue to tread lightly.

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