In this segment from Market Foolery, Mac Greer is joined by Motley Fool analysts Ron Gross and Jason Moser, who consider the case of athletic wear and fitness company Under Armour (NYSE:UA) (NYSE:UAA), which topped Wall Street expectations in the first quarter, even if that still meant it was losing money. Going from years of hype to a fair level of humility in recent quarters, where is the company headed from here?
A full transcript follows the video.
This video was recorded on April 27, 2017.
Mac Greer: Guys, let's begin with Under Armour. Shares up big on Thursday after the company reported a smaller than expected loss. Jason, I still hear the word loss in there, so why are investors so giddy?
Jason Moser: You have to love it when it's less bad than folks were expecting. A lot of what Wall Street focus is on quarter in and quarter out is just an expectations thing. I think this was a good report for Under Armour, if for nothing else that they set reasonable expectations. They did not go in there and raise guidance for the year based on, perhaps, any optimism they may feel for this coming year. I think management took a bit of a tone of humility based on the last couple quarters. These last couple of quarters really socked it to them. I think they needed to really get back to resetting expectations, focusing on getting the task done, and less on this hype cycle. Every quarter, quarter in and quarter out, a new record they were setting, and you could tell they were falling in love with themselves, they were falling for their own hype. I think there's a level of humility that needs to be entertained here, when you're in management with a public company. I think this has helped reset that bar for them.
Ron Gross: Is there still a lot of talk about Sports Authority and the impact that that has had on the industry? Or have they let that go?
Moser: I think this quarter, 2016 put a bow on that. We've seen that's now in the rearview mirror, and it's really looking forward and figuring out new distribution channels. They did fairly well in the wholesale side. The direct-to-consumer business grew a little bit more, it looked like. I think footwear is where they had a little bit of weakness there, and that was also on top of a pretty tough comp from last year. A lot of questions there in regard to connected fitness movement, and I think those questions are fair, given the amount of money they spent on these apps. The connected fitness business on its own grew 2% for the quarter. That's obviously not very impressive. But, management was very clear, they said in the call, these investments in connected fitness are all about having a better understanding of their consumers. So, I suspect in 10 years, we're not going to really be talking as much about connected fitness, I think we'll be looking back at the data that connected fitness provides for companies like Under Armour and Nike and whoever decides to use it. It's just a very obvious target right now because they paid so much for those businesses.
Greer: You just mentioned Nike. Nike is the big dog in this space. What's the case for investing in Under Armour as opposed to Nike?
Moser: I think it's just a matter of growth. With Under Armour, you have a company that's still very small, comparatively speaking. The bet is, ultimately, do you feel like Under Armour still represents that type of growth opportunity? Mac, we were talking before taping here, looking at those charts of Under Armour shares and where they fall. If you've been owning the shares for the past year as opposed to two years as opposed to the past five years -- if you bought Under Armour two years ago, you're clearly not very happy with the direction the stock has gone and the direction the company has gone. But if you look at it over the past five, 10, 15, the longer that timeline goes out, the better that story looks.
And generally speaking, when you want to do well as an individual investor in the stock market, you want to buy shares of good businesses when they're having some temporary hiccups. And honestly, I do feel like Under Armour is a very good business with a smart, proven leader. They hit a big stumbling block here. But let's remember, those can be very great learning opportunities. Reed Hastings, I think, is a good example. Good business there in Netflix, hit a big stumbling block there with the Qwikster debacle. I think he learned a few lessons there, perhaps on the humility front, reset expectations, got back down to brass tacks, and they are where they are today. I expect the same things for management here with Under Armour, but only time will tell.
Gross: Interesting comment. I'm a Nike shareholder, and I keep looking for a reason to get into Under Armour, and I just haven't pulled the trigger. I'm rooting against the company in the short-term because I want that stock to stumble a bit and give me a better entry point. I'm not there yet, but I'm laser-focused on it. I keep checking.
Jason Moser owns shares of Nike, Under Armour (A Shares), and Under Armour (C Shares). Mac Greer has no position in any stocks mentioned. Ron Gross owns shares of Nike. The Motley Fool owns shares of and recommends Netflix, Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.
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