Earnings Analysis: Under Armour Q1 2024
Summary: Under Armour has already written off this year. Stephanie Linnartz, who took over as CEO in February, has publicly said this year will be a difficult year for growth and the company has turned their attention to next year’s growth drivers.
As such, the company is going to produce another terrible year this year and uncertainty still remains high among investors. A few months ago, the company unveiled their growth plan, which we will cover in this article, but the company said they don’t expect material benefits from the plan until fiscal year 2025.
We have kept our price target nearly flat this quarter as investors confidence in Under Armour hangs on by a thread.
Previous price target: $7.44
New price target: $7.70
Current share price: $6.61
PTH3
Protect This House 3, abbreviated to PTH3, is Under Armour’s latest growth plan as presented by their new CEO Stephanie Linnartz.
The details of the plan reflect Linnartz’s previous work experience at Marriott International, where she worked for 25 years. Here are the plan’s three pillars:
Revamp and simplify the company’s brand, specifically in the US, to bring Under Armour back to appearing as a premium brand.
Building product line brands - especially within footwear, women’s, and athleisure - in collaboration with athletes and other celebrities.
Drive revenue growth domestically so the company can reinvest those profits into international markets.
Our thoughts? The plan is uninspiring. First, the plan is what Under Armour should be doing every hour of every day - creating the best products and marketing them in a way that shows customers why they should spend $110 on a pair of workout pants.
Second, the third part of the plan is completely unnecessary. “Driving revenue growth” should never be a step in any turnaround plan. Revenue growth only comes when a company provides increasing value to their customers.
How did we get here?
Under Armour was the premier Wall Street growth story from 2010 to 2015. The company grew revenue by more than 20% for 26 consecutive quarters on their way to a $21 billion market cap.
The company started to feel the pressure in 2016 as a combination of industry headwinds and market saturation hit Under Armour in a way they were not prepared for. In short, Under Armour thought they could grow revenue indefinitely and were completely unprepared for a world of slowing growth.
At its peak in 2016, Under Armour made $417 million in operating profit only to make $28 million in 2017 and lose $25 million in 2018 as their costs got out of control despite still growing revenue.
Since then, the company has struggled to meaningfully grow revenue and cut costs that has resulted in Under Armour’s stock dropping 87% from all-time highs.
Under Armour Today
The company remains one of largest athletic apparel and footwear companies in the world despite its flattening growth.
Footwear remains a small 27.6% percent of the company’s revenue compared to Nike, who makes 65% of its revenue from shoes. Under Armour has spent a decade trying to gain market share in the footwear world only to struggle despite having one of the most marketable basketball players in the world in Steph Curry.
Under Armour’s footwear sales have grown only 6% in the last eight quarters even as supply chain constraints have ebbed.
You may have noticed the company highlighted US revenue growth several times in their growth plan. That is because revenue growth in North America, which is mostly the United States, has really struggled in the last year. This last quarter was a disaster as revenue in the region dropped 9%.
Secondly, the company’s profit margin in the region has dropped in the last two years. The apparel industry has been feeling the pressure the last two years as supply chain constraints, skyrocketing freight rates, and increased discounting and inventory levels have dampened profit margins.
This is why the company has put such a large focus on North America. Over 60% of their revenue and the vast majority of their profit comes form the region. Its clear that if Under Armour is going to turn the company around, it must by protecting their home.
Valuation
We expect to keep our price target flat over the next two or three quarters as the company onboards new executives and starts work on their growth plan. The industry should benefit from lower freight prices, less global uncertainty, and less discounting activity but it remains to be seen how much of that will flow into Under Armour’s bottom line.
We remain bearish on the company continues to grapple with management turnover and the lack of an exciting growth plan. The business remains too volatile for us to feel confident in any long-term projections hence why we are avoiding Under Armour stock at this time.
Investment research disclaimer: the financial valuation methods, target prices, and model assumptions discussed above are for educational and informational purposes only and reflect only our views at the time of publishing. The information and/or strategies above should not be used to make investment decisions. Past results are not predictive of future performance and future investment proceeds are not risk free and cannot be guaranteed. We are not a registered investment advisor or broker and all investment decisions must be made independently of the educational research published here.