Under Armour shake-up shocks Wall Street, with ousted CEO seen as not given time to effect change

By Ciara Linnane and Bill Peters

Revolving door of CEOs at maker of sports and athleisure gear is disruptive and will weigh on the stock, Stifel says

Under Armour Inc.'s decision to oust its CEO and bring founder Kevin Plank back to run the athleisure-gear maker surprised analysts, given that the current CEO has spent only about a year in the role.

The announcement late Wednesday that Stephanie Linnartz is stepping down to be replaced by Plank sent Under Armour's stock (UAA) (UA) down 10% on Thursday.

"Simply put, we don't think this news is going to do much to help investor sentiment here," Wedbush analyst Tom Nikic said in a research note dated Wednesday.

"The game of 'musical chairs' in the CEO seat that UAA has undergone in recent years (3 CEOs in the 4-year gap between Mr. Plank's two tenures) brings a layer of inconsistency and uncertainty to the story that investors don't really want to see," he continued.

He added that based on conversations with the company, Plank appeared to be back at the helm for a longer stretch.

"On the bright side," he said, "Mr. Plank probably won't push himself out of the seat."

The stock has fallen 17% in the year to date, while the S&P 500 SPX has gained 8.3%. Since 2016, the stock has tumbled 82.8% amid concerns about competition from athletic-gear giants like Nike Inc. (NKE) and Adidas (ADDYY). Over the past two years, a surge in prices for food and other essentials has left less room in shoppers' budgets for clothing and sneakers.

Linnartz was named CEO, president and director in December 2022 and started her tenure in February 2023. Colin Browne had served as interim chief executive since June 2022, following the departure of Patrik Frisk.

Linnartz's appointment made history, as she was the first woman to lead a major U.S. sports brand. She brought in some key talent, including a chief commercial officer, chief communications officer, chief product officer, chief design officer, chief supply-chain officer, president of Americas, president of Europe, the Middle East and Africa, and chief marketing officer.

Under her "House 3" strategy, which aimed to increase brand heat, Linnartz sought to improve product design and return the U.S. business to growth.

She and her team were also determined to increase sales of women's products, which accounted for less than a quarter of overall sales, as Linnartz told MarketWatch last year.

"Women are 50% of the population, so there's absolutely no reason that we cannot get close to that number as a percentage of our overall sales over time," she said at the time.

According to separation agreement, detailed in a filing on Wednesday, Linnartz will get a $2.6 million cash payment, equal to two times her current salary, along with her annual bonus and full vesting of her restricted stock unit grants, which were worth around $7.3 million as of the grant date.

"Ms. Linnartz brought a unique leadership skill set, quickly implemented the UA Rewards program, and added key talent, but had insufficient time to effect change evident in reported results, in our view," Stifel analysts led by Jim Duffy wrote in a note to clients.

What's more, the leadership change is "disruptive," and the revolving door of CEOs will likely weigh on the stock, the analysts wrote.

They acknowledged that the company's valuation is still compelling, even if Under Armour is unlikely to reach its targeted improvement in the U.S. business until next year.

"Big picture, we continue to appreciate balance sheet strength, underlying global growth potential, and structural margin opportunities," they said. "Inflection in the North America market remains a key watch point" and one that they don't see the company reaching until next year.

For more, read: Less than 25% of Under Armour sales are women's wear. Here's how its new CEO plans to double that.

Plank returns to the role after a four-year hiatus. The businessman, who started Under Armour in his grandmother's basement while he was still in college, resigned from the role in 2019 amid reports that the Securities and Exchange Commission and the Justice Department were investigating the company's accounting practices.

In May of 2021, the SEC charged the company with misleading investors on the bases of its revenue growth and failing to disclose "known uncertainties concerning its future revenue prospects." Under Armour agreed to pay $9 million to settle the action.

The SEC found the company guilty of "channel-stuffing," or pulling forward some $408 million in existing orders that customers had requested be shipped in future quarters. The move came as the company was failing to meet internal sales projections for North America and falling short of analyst consensus estimates for revenue.

Plank continued to control the company under Linnartz's reign, thanks to his supervoting share ownership.

Jefferies analysts said the move reflected continued uncertainty at the company.

"We believe this transition suggests there is still a fair amount of moving pieces and uncertainty related to strategic direction around product, people and processes," they said in a Wednesday note following the announcement.

"Therefore, while we still believe the brand has ample value, we think uncertainty will continue to hinder share performance until investors see a turn in top line and margin trends," they said.

Nikic, however, noted that Under Armour was holding steady with its current strategy to drive U.S. sales.

"Which begs the question: If the strategy was fine, why make a change?" he said. "It's a question we hope to have answered as the dust settles."

-Ciara Linnane -Bill Peters

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03-14-24 1239ET

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