Under Armour Upgraded - But Still Risky

It’s been a tough two months for Under Armour (NYSE: UAA). They were already struggling to remain competitive against other athletic apparel names like Nike (NYSE: NKE) and Lululemon (NASDAQ: LULU) but this coronavirus lockdown has really crippled their revenue engine. Under Armour stores, just like all those excluding essentials such as groceries and pharmacies, have been forced to close indefinitely meaning they’ve lost all of their physical foot traffic and sales. On top of that, professional sports, amateur games, and gym have been closed and canceled across the country so there’s no reason to expect a big jump in online sales to make up for it.

Under Armour has been out of favor with investors for a while and shares cratered more than 60% from their early February levels through the start of April as the pandemic took hold. And while the S&P 500 and many individual names across industries have bounced hard from there, Under Armour’s stock is still down more than 50%. For context, Lululemon shares were down 40% at their lows but are now only down 9% since February and Nike stock has performed similarly. It fell about 30% through the end of March and has bounced hard enough to only be down 10% from pre-pandemic prices.

The Upgrade

However, this poor performance from one of Baltimore’s biggest companies looks to be overdone by some in the industry. On Monday, the folks over at BMO Capital Markets were out with an upgrade to Under Armour stock. Analyst Simeon Siegel raised the company from underperform to market perform, noting that there was an opportunity for management to use a “forced revenue reset to focus on profits and, as such, at current levels, we choose to move to the sidelines, and will monitor management's future decisions to re-engage." They’re not discounting future risks or the tough job ahead for management, but this could be a case of ‘shrinking to grow’.

However, it will be a steep climb. Even while upgrading the stock this week, Siegel maintained a price target of $9 which is right around where shares were trading on Monday. Earlier this month, the company laid off hundreds of employees in a bid to slash costs. They also pulled their Q1 and full-year guidance and outlook due to the uncertainty while executives have taken a 25% pay cut. With Q1 earnings around the corner, investors will be watching closely for any positive signs to reverse the trend.

Lipstick on a Pig?

CEO Patrik Frisk, who only took on the reins in January, commented earlier this month that "in these unprecedented and challenging times, the majority of stores where Under Armour is available to remain closed, contributing to a significant decline in revenue. While we're thankful for the meaningful balance sheet improvements we've driven over the past two years and we are seeing some early signs of recovery in our APAC region, this unanticipated shock to our business has been acute, forcing us to make difficult decisions to ensure that Under Armour is positioned to participate in the eventual recovery of demand.”

A restructuring plan that was discussed back in February was also given the green light and its overarching goal will be to rebalance the company's cost base while improving profitability and cash flow generation. That being said, Under Armour shares traded flat on the news of the upgrade and it will be a brave investor who starts getting involved at these levels. In early February, while the pandemic was still not being taken too seriously in the US, the company released their Q4 earnings which missed analyst expectations for both EPS and revenue. Shares fell more than 16% after the release, facilitated by a lowered guidance that caught Wall Street by surprise. Even with a 50% haircut in the meantime, has Under Armour’s growth potential increased? It’s difficult to say. The company struggled against competitors during the good times, so it’s hard to see them doing well against them in the bad times.