Why Under Armour Could Drop to $4 a Share
Global store closings and weakened demand for athletic wear sparked by COVID-19 are only a fraction of Under Armour’s long list of problems.
Shares of Under Armour lost a tenth of their value Monday when the company delivered worse-than-expected revenue and bigger than expected losses for the first quarter. Sales dropped 22% (ex FX) with management attributing 15% of the decline to the economic fallout resulting from COVID-19. Under Armour said about 80% of its business around the world remained closed since April, and warned Q2 revenue could slip 50% to 60%.
Under Armour entered the pandemic in a vulnerable state and, according to Susquehanna, “will emerge from the crisis severely impaired relative to its competitors” for three reasons:
Shelf space: uncertainty surrounding Under Armour’s ($UAA) ability to win back retail space with its North American wholesale accounts.
Product weakness: the potential for margin pressure to impede Under Armour’s product innovation and marketing prowess, combined with management’s misplaced focus on performance-related products (as opposed to fashion).
Inventory spike: an overload of inventory will force Under Armour to adopt aggressive promotional strategies.
Going down with the retail ship: Under Armour is dependent on the wholesale channel, which makes it vulnerable to negative brick & mortar trends. The accelerated shift to e-commerce has punished retailers that were too slow to adapt to changing consumer behavior. With many retailers shrinking their physical footprint by closing stores, Under Armour might find itself struggling to get its products in front of shoppers.
Analyst action:
Susquehanna lowers PT to $4 (from $6)
Jefferies lowers PT to $11 (from $14)
Cowen lowers PT to $8 (from $10)
B Riley FBR maintains $9 PT
