Is Under Armour a Buy Under $10
It’s been a couple of months since Under Armour’s (UA, UAA) CEO, Patrik Frisk, stepped down after 2.5 years in the top job.
Frisk joined the company in July 2017 in the role of President and Chief Operating Officer. He was promoted to CEO in January 2020 after founder and Executive Chairman Kevin Plank stepped down as the company’s chief executive.
“Our multi-year, transition approach has ensured purposeful leadership continuity. Patrik is the right person to serve as Under Armour’s next CEO,” Plank said in Under Armour’s January 2020 statement announcing the change. “As my partner during the most transformative chapter in our history, he has been exceptional in his ability to translate our brand’s vision into world-class execution by focusing on our long-term strategy and re-engineering our ecosystem through a strategic, operational and cultural transformation.”
The hopes were high for Frisk.
After 29 months as CEO, the Scandinavian native appears to have failed to deliver for shareholders. Now trading under $10, I’m left wondering if its stock is a buy.
UAA Traded Above $20 When Frisk Took Over
In January 2020, UAA traded a couple of dollars above $20. When Frisk joined the company in July 2017, its share price was around the same. Except for 2013 through 2017, Under Armour’s shares have spent most of their time under $20 since its November 2005 IPO.
So, whether you look at the stock’s performance from when Frisk became CEO or COO, it’s lost more than half its value. That’s hardly a ringing endorsement of the man Plank called “the right person to serve as Under Armour’s next CEO.”
I’d hate to be one of the directors sitting on the CEO Search Committee. If the company gets this hire wrong, it could spell the end of Under Armour.
When Frisk became COO in July 2017, it had just finished fiscal 2016 which saw sales increase 22% year-over-year to $4.83 billion, while its operating income was $417.5 million, 2% higher than in 2015. Not a bad financial situation to inherit.
However, by the end of 2017, most of Under Armour’s operating profit had disappeared. That year, it made $27.8 million in operating profits from $4.99 billion in sales. In 2018, it would deliver an operating loss of $25.0 million on $5.19 billion in sales.
By the time Frisk took over as CEO, Under Armour was back making money, although its operating margin of 4.5% in 2019 was about half what it was in 2016.
How’s It Done Since?
A little thing called Covid-19 got in the way.
In the three years 2019 through 2021, Under Armour’s sales rose 9.4% to $5.68 billion in 2021 from $5.19 billion in 2018. From 2016 to 2021, they grew 17.6%. That seems good. However, Nike (NKE) increased its sales over the past five years NKE) grew its sales by 36.0%, from $34.35 billion in fiscal 2017 (May year-end) to $46.71 billion in fiscal 2022.
And Nike’s growth was from a much larger revenue base.
The even bigger disappointment is how it fared against Lululemon (LULU), the Canadian-based athleisure brand that’s all the rage these days.
In 2016, just before Frisk became COO, Lululemon’s fiscal 2016 sales (January 2017 year-end) were $2.34 billion, less than half Under Armour’s. By fiscal 2021 (January 2022 year-end), they were $6.26 billion, about $580 million higher than Under Armour’s.
As for margins, LULU’s gross and operating margins today are 56.9% and 21.58%, respectively. Under Armour’s are 49.6% (730 basis points less) and 7.39% (1,419 basis points less).
Lululemon continues to run laps around Under Armour by every piece of financial data.
Frisk may have tightened the company’s operational standards. Still, he failed to deliver the kind of growth investors and, more importantly, Kevin Plank -- Under Armour’s largest shareholder with 65% of its votes -- have been hoping for years.
“The slogan of the company was ‘get big fast’ and they would go on earnings calls and tout the streak of 20%-plus revenue growth quarters that they had,” Tom Nikic, Wedbush senior analyst of apparel and footwear, recently said about Under Armour’s past, RetailDive reported. “Generating growth was extremely important to Kevin and I think he probably looks around and he sees really strong growth from Lululemon… Puma and Nike and Adidas.”
And he’s got to be none too happy.
The Bottom Line
Until Under Armour announces who the next CEO is, there is a risk in holding UAA in the near term. I’d be shocked if it didn’t hire someone who’s grown several brands in their career.
Until then, if you’re going to own a sportswear brand, you’re better to buy Nike or Lululemon. Both companies have a much clearer picture of where they want to go for growth.
Since 2011, Under Armour’s stock has traded under $10 on just two occasions: March 2020 and July 2022. If you’re an aggressive investor, I suppose the risk/reward is in your favor.
However, I have a hard time recommending a stock that’s had more than a decade to get its act together and failed to do so.
There are better options, in my opinion.
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