Here’s Why Under Armour Shares are Dropping (NYSE:UAA)

Under Armour (NYSE:UAA) shares are under pressure for the second time this year. The UAA stock price is down over 15% as of mid-morning trading. Shares have dipped below $18 and are testing year lows. Under Armour reported better than expected revenue and earnings for the third quarter. Revenue came in at $1.43 billion as opposed to analysts’ expectations for $1.41 billion. Earnings came in at 23 cents per share. This was well above expectations for earnings of 18 cents per share. And, it was higher than the 17 cents per share recorded for the same period in 2018.

So why the drop? One reason is that UAA lowered its forward guidance for fiscal 2019 revenue to be up 2% from the 3% to 4% they had previously forecast.

Another catalyst for the drop was the announcement of a Federal investigation into the company’s accounting practices. At issue are UAA’s revenue recognition practices. Specifically, the government is looking into whether the company shifted sales from quarter to quarter to make the numbers appear stronger.

On the company’s earnings call, Under Armour finance chief would only say, “We have been fully cooperating with these inquiries for nearly 2 ½ years. We firmly believe that our accounting practices and disclosures were appropriate.”

Time will tell if there’s any fire to go along with this smoke. The reality is that Under Armour is facing larger issues that have to do with revenue and sales.

The industry has caught up to Under Armour

Under Armour is getting undercut by the same audience that drove its growth. The company was founded in 1996 and quickly made inroads by focusing on an underserved market for “performance athletic gear”. Not surprisingly, teens and adults alike became obsessed with Under Armour. It became “cool” to wear Under Armour gear instead of Nike or Adidas.

But that’s changing. Under Armour reveled in its rebel image. They were the Avis to Nike’s Hertz. They were going to be the underdog. They were going to do things differently. But the problem for Under Armour at the moment is that they’re a fairly distant third in all three of the most dominant markets for their products including their bread-and-butter category of performance apparel.  

Nike and Adidas dominate the footwear and performance apparel markets. Under Armour became a relevant player due to their ability to get celebrity endorsements. But the reality is that UAA will have a difficult time competing with Nike and Adidas who can simply outspend Under Armour.

That leaves the growing category of athleisure wear. This is a category that was practically invented by Lululemon. And with Under Armour’s recent strategic decision to focus on the performance apparel segment, they are simply deciding not to compete in this area.

It’s the products, not the process

When incoming CEO Patrick Frisk joined the company in June 2017, he set out on a mission to transform the company’s product development process. But first, the company needed to conduct the all-important customer survey. I’m always dubious of surveys because, in many cases, a survey is deliberately constructed to not ask questions a company would prefer not to have answered.

I’m not saying this is the case with Under Armour, but a problem for the company seems to be that their sales are declining because consumers don’t want them. David Schwartz, an analyst for Morningstar, had this to say about the stock in August, a month that saw UAA stock decline 35%. “We think Under Armour will struggle to gain shelf space at premium shoe stores like Foot Locker and Finish Line in the U.S. as Under Armour lacks the styling and innovative product  of some competitors.” Schwartz went on to add, “We believe Under Armour lacks the design, talent, marketing, and resources to take share from Nike and Adidas in international markets and athletic shoe categories.”

Contrast that to Nike opening up their new “experience stores” that include design studios. Not only can customers see every part of the Nike shoe and how they are made, but the stores have on-site experts to provide advice on fit and fabric among other things. This is bolstering the trend for consumers to customize their footwear.

It comes down to sales

To gain traction, Under Armour will have to convince investors that it can increase sales in North America, its top market. Sales are declining at the same time that Nike and Adidas are opening more stores, introducing new products and increasing their advertising spend.  Add to that that Under Armour can’t expect to get a lift from their international markets which are also slowing down and have never been significant compared to Nike or Adidas, to begin with.

With a new Star Wars movie coming out, it’s apt to close with a bit of a metaphor. When Under Armour came onto the scene, it was positioning itself as Jedi knights trying to overcome the evil empire. Right now the empire is striking back and it doesn’t look good for Under Armour.