“Stronger, faster, smarter.”
That’s Kevin Plank’s new goal for Under Armour as the once-sprinting activewear brand sees its growth slow to well behind that of a four-minute mile — not good enough for Wall Street as the company gets outpaced by rivals Nike Inc. and, for now, Adidas.
The new game plan Plank outlined Tuesday is going to come at a huge cost — potentially up to $130 million — and didn’t impress investors, who sent Under Armour’s shares down to a 52-week low.
While Plank, the hard-charging founder and chief executive officer, laid out his plan to “pivot” and transcend a very tough market in the U.S. by building a better company, investors were focused on the here and now. Under Armour’s stock fell 10.4 percent to $16.23 after it said a “moderation in the company’s North American business” would hold revenue growth to 9 to 11 percent this year, down from the 11 to 12 percent previously projected.
The company also posted strong second-quarter sales and narrower losses.
But getting “stronger, faster and smarter” is going to cost Under Armour. The restructuring will lead to $110 million to $130 million in pretax restructuring charges this year, including $15 million for employee severance and $30 million to terminate contracts.
Plank’s going to have some help reshaping the company he founded, having brought Aldo and VF Corp. veteran Patrik Frisk on board last month to serve as president and chief operating officer.
Frisk is still getting his bearings at the company, but made some brief remarks to analysts on a conference call that sounded more like that of a rah-rah cheerleader than an executive admitting the firm faced challenges.
“The relentless pursuit of innovation, the attention to detail and the outright grit that goes into making all athletes better permeates from every corner of what this company does, and driving it is an infectious, authentic and entrepreneurial energy unlike anything I’ve experienced before,” Frisk said.
But Plank did most of the talking and he showed that he was mindful of the company’s position, the difficulties that lie ahead — and the opportunities.
“As the world’s third-largest athletic company, we are fiercely proud of the incredibly strong brand that we’ve built,” he said, acknowledging that “the playbook that got us to $5 billion is only part of what will deliver our next chapter of growth.”
“The landscape is evolving quickly,” Plank said. “Therefore, we, too, must evolve quickly. This evolution requires a pivot, and we’re doing just that.”
The strategic shifts he outlined, none of which will be easy, aim to move Under Armour from:
• A product company to a consumer focused and category-managed brand;
• A predominantly men’s business to distinct collections for men, women and kids;
• A U.S. apparel-centric business to a global apparel, footwear and accessories portfolio;
• A mainly wholesale approach to a more balanced direct-to-consumer offering;
• A historically top-line-driven operation to a more return-focused, financially disciplined model.
This is expected to drive a more efficient, more effective company that Plank said would focus on a “sharper consumer-led approach” that will latch on to five key opportunities, including men’s training, women’s, running, basketball and lifestyle.
“Reinforcing and building the Under Armour brand remains a vision for our company, and we’re in this fight,” the ceo said. “We’ve got a couple of competitors in front of us, there’s a number behind us, and you’ll see us continue to separate ourselves as we move forward in building the brand that we believe is the brand of the future.”
Analysts welcomed the company’s pivot, but the skeptics were not necessarily won over.
Instinet’s Simeon Siegel maintained his “reduce” rating on Under Armour’s stock, noting that it looks pricy based on earnings even with many investors shorting the stock, or betting it will fall.
“Although we’d applaud a focus on profits, [the company’s] valuation appears expensive on any profitability metric,” Siegel said. “It is only on sales opportunity that comparisons with larger peers can justify the belief that [Under Armour shares are] ‘cheap,’ in our view.”
Siegel did note that apparel sales growth accelerated to 11 percent in the second quarter, but also pointed out that footwear sales, which had been seen as the prime driver of Under Armour’s next leg of growth, fell 2 percent.
That decline in footwear, the analyst said, “should raise significant questions around Under Armour’s ultimate addressable market size as it relates to Nike and Adidas, which scaled via their much larger footwear businesses.”
Credit Suisse analyst Christian Buss also stayed put with his rating at “underperform” and said the company’s longer-term growth potential was “still opaque.”
“With apparel growth reaching maturity, we still remain cautious on the strategy for Under Armour to build a sustainable long-term growth model,” Buss said. “We see less clear direction as to the growth opportunity in footwear….Given low-single digit market share in footwear in the U.S., recent challenges suggest overcoming strong competition in this category from Adidas and Nike is likely to prove a lengthy process.”
But Under Armour still has its fans. Barclay’s Matthew McClintock said “smarter and learner growth can’t come faster” and kept his “overweight” rating on the stock.
He said the company’s growth in the second half would be driven by “footwear launches such as the Icon, C1N, Harper 2, Bandit 3 and Curry 4. On the apparel side, expanded offerings within the Threadborne and Reactor platforms will be launched in the fall. Moreover, we are bullish on [Under Armour’s] progress on clear price point segmentation.”
In the second quarter, Under Armour’s net losses narrowed to $12.3 million, or 3 cents a share, from $52.7 million, or 12 cents, a year earlier. Sales for the quarter ended June 30 rose 8.7 percent to $1.09 billion.
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