Is Under Armour a Good Buy?

Under Armour, a prominent name in the athletic apparel industry, has been facing a tumultuous period marked by financial challenges, restructuring efforts, and mixed customer reviews. This report aims to provide an in-depth analysis of whether Under Armour (UA) is a good buy, considering various aspects such as financial performance, market position, customer sentiment, and strategic initiatives. By examining these factors, we aim to offer a well-rounded perspective on the investment potential of Under Armour.

Financial Performance

Revenue and Profitability

Under Armour’s financial performance has been under scrutiny, especially after the company reported a significant drop in fourth-quarter profit, falling short of analyst estimates. The company’s net income for the trailing twelve months (ttm) stands at $232.04 million, with a diluted EPS (ttm) of 0.52. Despite these figures, the company’s stock has been underperforming, down by nearly 14% in premarket trading as of the latest reports.

The company’s revenue in North America, its largest market, has been declining due to inflation-weary consumers pulling back on new clothes and shoes. This decline is a significant concern, as North America is a critical revenue driver for Under Armour. The company has announced a restructuring plan to “meaningfully reset” its business in North America, which includes focusing on selling fewer products at discounts.

Debt and Cash Flow

Under Armour’s financial stability is further complicated by its debt levels. The company has a total cash (mrq) of $858.69 million and a total debt/equity (mrq) ratio of 67.00%. The levered free cash flow (ttm) is reported to be $151.11 million. While the company has a substantial cash reserve, the high debt/equity ratio indicates a significant reliance on borrowed funds, which could pose risks if the company’s revenue continues to decline.

Moreover, Under Armour has agreed to a $434 million settlement in a class action securities litigation case, which will be paid through cash on hand and/or by drawing on its $1.1 billion revolving credit facility. This settlement will impact the company’s cash reserves, with expectations to end fiscal 2025 with approximately $500 million in cash and cash equivalents.

Analyst Recommendations and Price Targets

Despite the financial challenges, analyst recommendations for Under Armour’s stock are mostly positive, with ratings of “Strong Buy” or “Buy” from several research firms. The average analyst price target for UAA is $6.82, with a high target of $15.00. These recommendations suggest that there is still optimism about the company’s potential for recovery and growth.

Market Position and Competition

Market Share

Under Armour holds a relatively small market share in the athletic apparel industry compared to its competitors. As of Q4 2023, Under Armour’s market share was 4.36%, a slight decrease from 4.42% in the previous quarter and 4.69% in the same quarter of the previous year. In contrast, Nike dominates the market with a 38.94% share, followed by Adidas with 12.53%, and Columbia Sportswear with 2.59%.

Revenue Comparison

In terms of revenue, Under Armour lags significantly behind its main competitors. In 2023, Nike reported a global revenue of $50.9 billion, Adidas $31.6 billion, and Puma $7.5 billion. Under Armour’s net revenue for 2023 was $6.2 billion, highlighting the substantial gap between the company and its larger rivals. This disparity underscores the challenges Under Armour faces in gaining a more substantial foothold in the market.

Regional Sales

Under Armour’s regional sales are also a point of concern. Nike and Adidas have a strong presence in North America and Europe, while Under Armour struggles to maintain its market share in these regions. The company’s focus on resetting its North American business is a strategic move, but it remains to be seen whether this will translate into improved market performance.

Customer Sentiment

Mixed Reviews

Customer sentiment towards Under Armour is mixed, with significant criticism directed at the company’s customer service and return policies. Reviews on platforms like Trustpilot highlight issues such as delayed or missing refunds, poor communication from customer service, and difficulties in returning items. These negative experiences can erode customer trust and loyalty, which are crucial for long-term business success.

Positive Feedback

Despite the negative reviews, there are also positive comments about the quality and performance of Under Armour’s products. Some customers praise the affordability and helpfulness of staff at Under Armour Factory House locations. However, the positive feedback is often overshadowed by the more frequent complaints about customer service issues.

Fraudulent Practices

There have been reports of fraudulent practices by Under Armour UAE, with customers experiencing issues with refunds and unfulfilled orders. The company’s lack of public response to these allegations further damages its reputation and raises concerns about its commitment to customer satisfaction.

Strategic Initiatives

Restructuring Plan

Under Armour’s restructuring plan aims to address the declining revenue in North America by focusing on selling fewer products at discounts. This strategy is intended to improve profit margins and reset the business in its largest market. However, the success of this plan will depend on the company’s ability to attract and retain customers without relying heavily on discounts.

Share Repurchase Program

The company has announced a new $500 million share repurchase program, which could be seen as a move to boost investor confidence and support the stock price. While share repurchase programs can be beneficial for shareholders, they also require significant cash outflows, which could strain the company’s financial resources, especially given its existing debt levels and the recent settlement payment.

Leadership Changes

Under Armour has undergone several leadership changes in recent months, including the departure of its CEO and Chief People and Administrative Officer. Two-thirds of the executive team is new compared to the prior year, with new appointments such as a new product chief, head of the Americas, and chief design officer. These changes could bring fresh perspectives and strategies to the company, but they also introduce uncertainty and potential instability during the transition period.

Digital Fitness App

The company is expected to focus on improving its digital fitness app, MapMyFitness, as part of its broader strategy to enhance its digital presence. Investing in digital platforms can help Under Armour tap into the growing market for fitness technology and create new revenue streams. However, the success of this initiative will depend on the company’s ability to compete with established players in the digital fitness space.

Conclusion

Financial Challenges

Under Armour faces significant financial challenges, including declining revenue in its largest market, high debt levels, and the impact of a substantial settlement payment. While the company has a solid cash reserve, its financial stability is a concern, especially if the restructuring efforts do not yield the desired results.

Market Position

The company’s market position is relatively weak compared to its main competitors, Nike and Adidas. Under Armour’s small market share and lower revenue highlight the uphill battle it faces in gaining a more substantial presence in the athletic apparel industry.

Customer Sentiment

Mixed customer reviews and reports of fraudulent practices further complicate Under Armour’s prospects. Addressing these issues is crucial for rebuilding customer trust and loyalty, which are essential for long-term success.

Strategic Initiatives

Under Armour’s strategic initiatives, including the restructuring plan, share repurchase program, leadership changes, and focus on digital fitness, offer potential pathways for recovery and growth. However, these initiatives also carry risks and uncertainties that need to be carefully managed.

Investment Recommendation

Given the current financial challenges, market position, and mixed customer sentiment, Under Armour presents a high-risk investment. While there are positive signs, such as analyst recommendations and strategic initiatives, the company’s ability to navigate its financial and operational challenges remains uncertain. Investors should carefully consider these factors and their risk tolerance before making a decision.

In conclusion, Under Armour is not a clear-cut buy at this time. The company’s potential for recovery and growth exists, but it is accompanied by significant risks and uncertainties. Investors should closely monitor the company’s progress in executing its strategic initiatives and addressing its financial challenges before making an investment decision.