Memo to Kevin Plank: Fix Under Armour… Not Baltimore

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club
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What do you call a public company that isn’t a growth stock... or a value stock?

How about “a disaster”?

Let’s use Under Armour (NYSE: UA) as an example.

The Baltimore-based company is a popular developer, manufacturer and seller of sports apparel and footwear.

Kevin Plank, a former University of Maryland football player, founded the company in 1996 with performance apparel engineered to keep athletes cool, light and dry.

Working out of his grandmother’s basement, he traveled up and down the East Coast selling the shirts out of the trunk of his car. They were an immediate hit and - with a bit of clever marketing - quickly became “must-have” items for serious athletes.

Under Armour clothing moved beyond the playing field and was soon seen in offices and other places of business.

New technologies - that made its clothing softer, thinner or wick better - kept customers coming back for more. Annual sales topped $4.8 billion.

The company aimed high, setting its sights on its two enormous - and enormously successful - global competitors: Nike (NYSE: NKE) and Adidas (OTC: ADDYY).

And for a while, it looked like it might eventually overtake them. Through the end of 2016, Under Armour reported 26 straight quarters of 20%-plus sales growth.

Yet that growth suddenly declined in the first two quarters of this year. And this past week, Under Armour dropped a real neutron bomb.

Sales actually declined 4.5% in the September quarter. Earnings plunged 58%.

The market’s reaction was instantaneous. Under Armour shares collapsed 22% in a single session.

They are down 57% over the last 52 weeks vs. a 22% gain in the S&P 500.

For shareholders, this is a disaster. Yet it appears to be far from over.

Founder and CEO Plank conceded this week that he had been “a little braggish” about the company’s accomplishments in the past. Yet he blamed the company’s recent setback, in part, on the bankruptcy filings of distributors Sports Authority and Sports Chalet.

Curious how this did not cause a sales decline at competitors Nike and Adidas.

Under Armour’s bigger problem is that the brand - like a restaurant that is no longer “the place to go” - has lost its cachet. Other apparel companies are offering similar quality merchandise - and brand loyalty is breaking down.

This is largely because Under Armour is not price competitive. Its apparel - rarely on sale - often sells for twice as much as competitors’.

Yet listen to this entirely tone-deaf remark by Plank this week:

We invented the $25 T-shirt. We’ve pressed the bounds as to what consumers will pay for apparel. That will continue. No one is looking for Under Armour to have the $25 hooded fleece. They want Under Armour at the $75 and $100 price points.

Got that? Customers don’t want lower prices on Under Armour goods. They prefer to pay more.

His comments were borderline delusional.

There are only three types of companies that don’t need to be price competitive. The first is companies experiencing extraordinary product demand.

As the recent sales decline suggests, that is not the case here.

Or a company can maintain high prices if it has a monopoly on its product or service.

Yet the apparel business is just the opposite, ferociously competitive.

The third group is companies in the luxury business - think Rolex or Louis Vuitton - that avoid discounting to maintain their aura of opulence or extravagance.

Few of us view gym shorts and sweatshirts that way.

So what the heck is Plank thinking about?

Maybe it's the historic Sagamore Farm in Baltimore County where he plans to raise a Triple Crown-winning horse.

Perhaps it's the more than 100 acres in the Port Covington industrial area along the Patapsco River in South Baltimore, where he has plotted a $5.5 billion development project.

Maybe it’s the University of Maryland’s Robert H. Smith School of Business, where he sits on the board of trustees.

Whatever it is, he ought to go back to being CEO of Under Armour and recognize that the number of consumers looking to drop a hundred bucks on a hoodie is not growing.

Where does all this leave Under Armour shareholders? Not in a good place.

A company that reports a 58% fall in earnings on a 4.5% decline in sales is - by definition - not a growth stock.

And a company with metrics this lousy that sells for 28 times trailing earnings and 2.5 times book value - and pays no dividend - is not a value stock.

That means shareholders are likely in for more pain and suffering.

Good investing,

Alex

Thoughts on this article? Leave a comment below.

One of the Only Clothiers That’s Still Growing

Alex has been following the downward trend in the retail sector for months - as have his Oxford Communiqué subscribers.

But those subscribers have profited from Alex’s recommendation of one apparel company that has outsmarted the rest.

It’s TJX (NYSE: TJX), a discount clothier with an attractive valuation and an Amazon-proof business model. Here’s Alex checking on the company back in June...

There are still plenty of stocks out there that are reasonably priced.

One of them is The TJX Companies (NYSE: TJX).

Based in Framingham, Massachusetts, TJX is the world’s leading off-price retailer. It owns the T.J. Maxx, Marshalls and HomeGoods chains, as well as the fast-growing online retailer Sierra Trading Post.

The specialty of T.J. Maxx and Marshalls is first-quality, in-season, name-brand fashion apparel and accessories. (The HomeGoods division offers an eclectic mix of home fashions from around the world.)

However, you need only look at the share prices of Macy’s (NYSE: M), Sears (Nasdaq: SHLD) and J.C. Penney (NYSE: JCP) to realize that this has not been a particularly auspicious time for brick-and-mortar retailers.

Almost all are getting steamrolled by Amazon, the e-commerce giant that is selling more and more for less and less... and shipping much of it for free.

Fortunately, TJX operates in a niche that allows it to avoid getting squashed.

It continually scours over 18,000 vendors and manufacturers in more than 100 countries, buying up excess merchandise at closeouts and offering it to customers at deep discounts to the sticker price.

Even if you visit outlet stores for Calvin Klein, Tommy Hilfiger, Guess or Under Armour - or Amazon - you’ll find that prices are generally higher than the everyday prices at T.J. Maxx and Marshalls.

TJX is on a roll. It has outperformed the S&P 500 Retail Select Industry benchmark significantly over the last two years.

Unlike 90%-plus of brick-and-mortar retailers, sales at the company’s existing stores are still growing. (Even though liquidation sales at J.C. Penney, Sears, Payless ShoeSource and others have temporarily shifted traffic away from the off-price stores.)

According to FactSet, sales per square foot at TJX have risen for six years in a row.

Rivals are shuttering stores, but TJX plans to expand its store count from 3,812 to 5,600 over the next few years.

- Samuel Taube with Alexander Green

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