Company Reports

In a move that always seemed like a strong possibility, no-moat Under Armour has shown Stephanie Linnartz the door and restored cofounder Kevin Plank to the CEO position. Plank will be replaced as chairman by Mohamed El-Erian, the well-known former CEO of bond giant Pimco. Plank had left the top spot at the beginning of 2020 after some embarrassing press and declining results but had always remained heavily involved as Under Armour’s executive chairman, brand chief, and controlling shareholder. Plank’s original successor as CEO was Patrik Frisk, but he was let go after about two and a half years. At the time, Plank cited a need to return to the firm’s glory days of strong sales growth. Frisk was succeeded on an interim basis by Colin Browne, the company’s chief operating officer until he was passed over for the permanent position in favor of Linnartz, a former executive at wide-moat Marriott. While Linnartz had strong experience in helping to build digital tools and a loyalty program at Marriott, she was an unorthodox choice for Under Armour as she had no experience in apparel and footwear. As it turned out, she lasted just over a year in the job. In her brief tenure, she brought in many executives and launched a loyalty program, but, like her successors, she struggled to find much sales growth.

We view Under Armour as lacking a moat, given its failure to build a competitive advantage over other athletic apparel firms. Between 2008 and 2016, the firm’s North American sales increased to $4 billion from $700 million and it passed narrow-moat Adidas as the region’s second-largest athletic apparel brand (after wide-moat Nike). However, Under Armour’s North America sales are little changed over the past seven years as it has been challenged by established competitors and new entrants. While Under Armour’s new Protect This House 3 plan is designed to make the brand more competitive in the U.S. through its merchandising, e-commerce, and supply chain efforts, we think it has fallen behind some peers on innovation, sponsorships, and style.

Under Armour's fiscal 2024 third-quarter profitability surpassed our forecast despite underwhelming sales, especially in the North America wholesale channel. While short-term sales improvement is unlikely due to its long product development cycle and industrywide weakness in sportswear, Under Armour's guidance for fiscal 2024 adjusted EPS of $0.50-$0.52 aligns with our forecast. Thus, we do not expect to make any material change to our $15.50 fair value estimate and view its shares as undervalued. Although we rate Under Armour as a no-moat company, it has a strong balance sheet, competes in an attractive space, and has potential for growth in casual activewear.

We view Under Armour as lacking a moat, given its failure to build a competitive advantage over other athletic apparel firms. Between 2008 and 2016, the firm’s North American sales increased to $4 billion from $700 million and it passed narrow-moat Adidas as the region’s second-largest athletic apparel brand (after wide-moat Nike). However, Under Armour’s North America sales are little changed over the past seven years as it has been challenged by major competitors like wide-moat Nike and new entrants alike. While Under Armour’s new Protect This House 3 plan is designed to make the brand more competitive in the U.S. through its merchandising, e-commerce, and supply chain efforts, we think it has fallen behind on innovation, sponsorships, and style.

Under Armour’s sales and earnings came in slightly better than expected in fiscal 2024’s second quarter, but it trimmed its second-half guidance on weakness in the North America wholesale channel, an issue that we believe is affecting many peers. As the firm did not revise its outlook for fiscal 2024 EPS of $0.47-$0.51, we do not expect to make any material change to our $15.50 fair value estimate and view shares as very undervalued. Although we rate the company as no-moat, we believe it has strengths, including its position in the attractive activewear space and a solid balance sheet with just $20 million in net debt at the end of September.

We view Under Armour as lacking a moat, given its failure to build a competitive advantage over other athletic apparel firms. Between 2008 and 2016, the firm’s North American sales increased to $4 billion from $700 million and it passed narrow-moat Adidas as the region’s second-largest athletic apparel brand (after wide-moat Nike). However, Under Armour’s North America sales are little changed over the past seven years as it has been challenged by major competitors like wide-moat Nike and new entrants alike. While Under Armour’s new Protect This House 3 plan is designed to make the brand more competitive in the U.S. through its merchandising, e-commerce, and supply chain efforts, we think it has fallen behind on innovation, sponsorships, and style.

We do not expect to make any material change to our $15.50 fair value estimate on Under Armour after it posted in-line fiscal 2024 (June-ended) first-quarter results and maintained its full-year guidance for revenue (flat to slightly up), gross margin (45.2%-45.7%), and EPS ($0.47-$0.51). We view its shares as very attractive at current levels. Although we see Under Armour as a no-moat company, we believe it has strengths, including its popularity in performance sports apparel, long-term agreement with Steph Curry, and solid balance sheet. While the U.S. wholesale channel is challenged by excess inventory and discounting across activewear, we anticipate conditions will normalize over the next few quarters.

We view Under Armour as lacking a moat, given its failure to build a competitive advantage over other athletic apparel firms. Between 2008 and 2016, the firm’s North American sales increased to $4 billion from $700 million and it passed narrow-moat Adidas as the region’s second-largest athletic apparel brand (after wide-moat Nike). However, Under Armour’s North America sales are little changed over the past seven years as it has restructured, and demand for performance gear, its primary category, has lagged that of athleisure. While activewear sales surged during the pandemic, we think Under Armour has fallen behind on innovation and its product is not sufficiently differentiated. The firm plans to introduce more casual apparel items, but these products are unlikely to generate material sales given the intense competition.

Under Armour wrapped its (March-ended) fiscal 2023 with mixed fourth-quarter results that were close to our expectations. However, its shares fell a mid-single-digit percentage on the report due to a disappointing fiscal 2024 outlook for flat to slightly up sales and EPS of $0.47-$0.51 (our pre-report estimates were 4% sales growth and $0.63 in EPS). The firm guided to a weak start to the fiscal year due to the high inventories (up 44% at year-end) that will necessitate discounting. We expect to reduce our fiscal 2024 estimates on this outlook but do not expect to make any material change to our $15.50 per share fair value estimate. While sales growth and margin improvement under new CEO Stephanie Linnartz may not be apparent until fiscal 2025, we view Under Armour, trading at a low-double-digit P/E on trailing earnings, as very undervalued. We rate it as a no-moat firm but also believe it has competitive strengths, including its position as a premium athletic brand. In addition, its financial position remains solid, as it closed fiscal 2023 with more cash ($712 million) than long-term debt ($675 million) despite a difficult year.

We view Under Armour as lacking a moat, given its failure to build a competitive advantage over other athletic apparel firms. Between 2008 and 2016, the firm’s North American sales (around 70% of its consolidated base) increased to $4 billion from $700 million and it passed narrow-moat Adidas as the region’s second-largest athletic apparel brand (after wide-moat Nike). However, Under Armour’s North America sales have not grown over the past six years as it restructured and demand for performance gear, its primary category, has lagged that of athleisure. While sales of all activewear have been strong during the pandemic, we think Under Armour has fallen behind on innovation and its product is not sufficiently differentiated. The firm plans to introduce more casual apparel items, but these products are unlikely to generate material sales given the intense competition.

No-moat Under Armour overcame challenging conditions to post results for its fiscal 2023 third quarter (ended December) that outperformed our expectations. The quarter was the final period before Stephanie Linnartz assumes the CEO role at the end of this month. We do not expect to make any material change to our $15.50 fair value estimate, and we still view the shares as undervalued. After years of restructuring, we believe Under Armour is making progress on its supply chain, distribution, and product initiatives.

Seven months after Patrik Frisk’s unexpected exit, no-moat Under Armour has chosen Stephanie Linnartz as its new CEO. She will join the firm in late February and will work closely with both executive chairman Kevin Plank and interim CEO Colin Browne, who will return to his position as COO.

We view Under Armour as lacking a moat, given its failure to build a competitive advantage over other athletic apparel firms. Between 2008 and 2016, the firm’s North American sales (around 70% of its consolidated base) increased to $4 billion from $700 million and it passed narrow-moat Adidas as the region’s second-largest athletic apparel brand (after wide-moat Nike). However, Under Armour’s North America sales have not grown over the past five years as it restructured and demand for performance gear, its primary category, has lagged that of athleisure. While sales of all activewear have been strong during the pandemic, we think Under Armour has fallen behind on innovation and its product is not sufficiently differentiated. The firm plans to introduce more casual apparel items, but these products are unlikely to generate material sales given the intense competition.

Despite weakening market conditions, Under Armour’s fiscal 2023 second-quarter results were in line with our forecast and its guidance in August. Moreover, while it lowered its outlook for the second half of the year, the revision was minor and less than feared, leading investors to bid up its shares by more than 10%. Based on the results and outlook, we do not expect to make any material change to our $15.70 fair value estimate and continue to view Under Armour as very undervalued. While we view it as a no-moat firm, we think it does benefit from the growth of activewear and wide-moat Nike’s pullback in distribution, especially in footwear. Moreover, Under Armour has a solid balance sheet, closing the quarter with $180 million in net cash after essentially breaking even on operating cash flow in the first half.

Investors have forsaken apparel manufacturers and retailers, which we believe present numerous attractive opportunities. These firms have struggled with many issues in 2022, including higher inventories, lower operating margins, inflation, logistical challenges, tough comparisons with 2021, low international travel, and an extremely strong U.S. dollar. However, we see positive signs. In recent weeks, shipping has shown signs of normalizing, and gas prices have dropped. Moreover, we anticipate inventory levels will improve as manufacturers cancel shipments and sales increase in the holiday season (as is typical). In 2023, we anticipate the benefits of investments in supply chains and other operations by many apparel firms will become more apparent. Consequently, despite widespread pessimism in the market, we believe now is a good time to consider the many apparel stocks trading well below our fair value estimates.

We view Under Armour as lacking an economic moat, given its failure to build a competitive advantage over other athletic apparel firms. Between 2008 and 2016, the firm’s North American sales (around 70% of its consolidated base) increased to $4 billion from $700 million and it passed narrow-moat Adidas as the region’s second-largest athletic apparel brand (after wide-moat Nike). However, its North America sales have not grown over the past five years as it restructured and demand for performance gear, Under Armour’s primary category, has lagged that of athleisure. While sales of all activewear have been strong during the pandemic, we think the long-term benefits for the company will be limited as compared with global brands wide-moat Nike and narrow-moat Adidas. We think Under Armour has fallen behind on innovation and its product is not sufficiently differentiated.

Despite parting ways with former CEO Patrik Frisk, Under Armour reported results for its June-ended fiscal 2023 first quarter that were consistent with its guidance and our estimates. Moreover, despite a difficult economic environment, it reaffirmed its outlook for 5%-7% revenue growth in fiscal 2023. This news was tempered by lowered profit guidance for the rest of the fiscal year in anticipation of markdowns to clear inventory (up 8% from last year) and higher shipping and other costs. Under Armour's guidance is now for gross margin around 45.5% for the year, well below our 48% forecast and the 49% average over the past couple of years. The company also now expects fiscal 2023 adjusted earnings per share of $0.47-$0.53, below our $0.61 forecast. Even so, this shortfall will result in just a low-single-digit percentage cut to our $16.30 fair value estimate, and we view both share classes (down more than 50% this year) as undervalued. Although we rate it as having no moat, we think Under Armour—the third-largest player in U.S. sportswear—stands to benefit from the ongoing popularity of activewear and the recovery of the market from the pandemic, as well as its yearslong turnaround efforts.

No-moat Under Armour announced Patrik Frisk will resign from his CEO and director positions as of June 1. Frisk replaced cofounder and controlling shareholder Kevin Plank as CEO in January 2020. While no specific reason was given for the resignation, Plank’s comments in the press release suggest the company is looking for new growth opportunities after years of expense optimization efforts. Frisk will be replaced as CEO on an interim basis by chief operating officer Colin Browne, a former executive at narrow-moat VF Corporation. Under Armour will conduct an external search for a permanent CEO, but the timing is unknown.

We view Under Armour as lacking an economic moat, given its failure to build a competitive advantage over other athletic apparel firms. Between 2008 and 2016, Under Armour’s North American sales (around 70% of its consolidated base) increased to $4 billion from $700 million and it passed narrow-moat Adidas as the region’s second-largest athletic apparel brand (after wide-moat Nike). However, its North America sales have not grown over the past five years as it restructured and demand for performance gear, Under Armour’s primary category, has lagged that of athleisure. While sales of all activewear have been strong during the pandemic, we think the long-term benefits for Under Armour will be limited as compared with global brands wide-moat Nike and narrow-moat Adidas. We think Under Armour has fallen behind on innovation and its product is not sufficiently differentiated.

With its shares down more than 40% this year, we think Under Armour is very undervalued and may be attractive to value investors. Although we rate it as a no-moat company, we think Under Armour, third largest in the U.S. sportswear market, stands to benefit from the ongoing popularity of activewear and the recovery of the market from the pandemic. Our fair value estimate is $16.30, implying upside of about 60% and 50% on its Class C and Class A shares, respectively.