2019 was a pretty bad year for Under Armour (NYSE: UA). The athletic apparel maker company saw sales grow a meager 1.4%, marking its slowest 12 months pace since it went public more than a decade ago.
These are the tell-tale signs of a business in decline, and its outlook for 2020 doesn’t look much better. CEO Patrik Frisk gave some gloomy guidance in his first earnings call as the head of the company, which was particularly dampened by an additional $60 million expected due to the coronavirus. Shares fell 19% after the report, and Frisk didn’t hide his disappointment, saying:
“First and foremost, I am not satisfied with where we are today,”
So where did it all go wrong for Under Armour?
1. It can’t keep up with the competition
It would be very easy to point at the retail industry itself as being at fault for Under Armour’s current situation, as brick-and-mortar companies nationwide struggle, but competitors such as Nike (NYSE: NKE) and Lululemon (NASDAQ: LULU) have been crushing it lately. It can be very hard to grow when the competition is so strong.
Lululemon, in particular, has been surpassing all expectations, with 2019 being no different. The clothing company had revenues of $916 million in its last quarter, representing a year-on-year increase of 23%. Management was so satisfied with its holiday sales, that it updated its revenue and earnings per share guidance for the final quarter of 2019.
Lululemon’s stock is up 61% over the past 12 months, compared to Under Armour’s drop of 23%. Things aren’t looking much better when compared to Nike either, which is up 22% in the past year.
Nike’s profit margins have been increasing in recent years as it begins to cut down on marketing spend: the perks of being a global megabrand. This has helped it gain a gross profit increase of 11% over the past two quarters. The company is constantly innovating, considered by some as the Apple (NASDAQ: AAPL) of apparel, and its move to invest heavily in online retail has helped it avoid the dreaded ‘retail apocalypse’.
As Jim Cramer put it when speaking to CNBC in early February: “Maybe Nike is just too powerful.”
2. It’s no longer popular
Simply put, Under Armour is just not popular among a very important demographic in the U.S: teens.
The company’s stock price performance has directly correlated with its performance in brand surveys, which have not been kind to Under Armour. In Piper Jaffrey’s most recent ‘Taking Stock With Teens’ survey, for example, Under Armour was sitting at No. 9 in preferred footwear amongst U.S. teens (Nike was first, Adidas was third) and No. 12 in preferred apparel brand.
When it first came onto the scene, Under Armour was an exciting new, tech-driven apparel company, with a focus on performance rather than style. However, this soon grew old, as competitors began to offer more stylish gear. Under Armour continued to focus on the performance side of things, as customers began looking for trendier clothes, cooler shoes, and generally more fashionable options. The company appears to have completely missed the trick, with the athleisure industry expected to grow at 6.7% CAGR to hit $257 billion by 2026.
The company did partner with popular NBA star Steph Curry back in 2013 in an attempt to build an international apparel empire as Nike achieved with Michael Jordan. However, the company overproduced the line, ending up at discount prices in stores. It also didn’t help that they were quite ugly. Once more, its brand perception was ruined amongst customers.
3. No apparent future plans
So where does that leave Under Armour in 2020?
We saw already that the company was not exactly upbeat about 2020, expecting further losses due to the coronavirus and restructuring the business, which could cost upwards of $400 million.
The company is also in the midst of an ongoing FTC investigation by the U.S. Securities and Exchange Commission, which has been probing accounting practices for two years, around the same time that its stock began to fall. There was no update given, but if it is discovered that the company was cooking the books, it would be another disastrous result.
Elsewhere, the company simply failed to capitalize on the growing e-commerce market as Nike did. Now, much like fellow brick-and-mortar-based company’s Macy’s (NYSE: M) and JC Penney (NYSE: JCP), it is experiencing the sting of the sector’s decline. The company is now expected to forego plans for a $250 million flagship store in Manhattan.
There is some hope for Under Armour following founder Kevin Plank’s stepping down on January 1, as new CEO Frisk has experience in revitalizing a company, having done so with shoe-company Aldo (IDX: ALDO). He is under no illusions about the severity of the situation and hopefully can turn the company’s fortunes around.
For now though, it is difficult to see a silver lining for Under Armour.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Under Armour. Read our full disclosure policy here.
Content Manager at MyWallSt
Jamie is the Content Editor here at MyWallSt. His favorite stock is Apple, which is also the first stock he ever bought. Jamie is not only a big fan of its products, but he believes that the tech giant has a whole lot more to give the world, and hasn't even scraped the surface of its potential.