Why Under Armour Got Battered Despite a Smaller-Than-Expected Loss

In this Market Foolery segment, host Mac Greer, David Kretzmann of Supernova and Rule Breakers, and Ron Gross of Motley Fool Total Income discuss the situation of athletic apparel upstart, which had shareholders sweating even more after its quarterly report. The numbers weren't actually that bad, but when it adjusted its outlook downward and announced layoffs and a restructuring, Under Armour (UAA 0.74%) (UA 1.39%) made it clear that its rapid growth story is definitively over for now. The question for the Fools: What's next?

A full transcript follows the video.

This video was recorded on August 1, 2017.

Mac Greer: Shares of Under Armour down big on Tuesday. Ron, a narrower-than-expected loss. That sounds good, right?

Ron Gross: I don't know about good. "Good" in quotes?

Greer: "Good" in quotes. Better-than-expected sales. That's good, right? But the company cut its outlook for the full year and cut 2% of its workforce. Ron, what's going on with Under Armour?

Gross: I don't mean to be too harsh here, because it is overall an amazing story and an amazing company. However, what I think we have here is really a busted growth story. Twenty-six-quarter streak of growing sales at 20% or more ended in the fourth quarter of 2016, and we've seen that ending follow through into subsequent quarters. Revenue only up about 9%; guidance is in the 9%-11% range going forward. It's not the same company it used to be. It's struggling.

Certainly Nike is the 10,000-pound gorilla here, at a $98 billion market cap versus Under Armour's measly $7 [billion]-$8 billion. I say "measly" kind of tongue in cheek, but it is quite a bit smaller than Nike, and it is struggling. Their restructuring plan does make sense. They have to trim some cost; they have to get out of some leases that are probably dragging down their earnings. They'll have to pay $100 million or $110 million as a result of this restructuring, partly from these lease terminations, partly from contract terminations and severance payments, but it will lean them out a bit, and maybe that narrower loss will turn the corner into profitability.

David Kretzmann: I think in general, this is probably a good thing for Kevin Plank to go through. This will humble him a bit, if that's possible. The company really has to become more disciplined now. I think he recognizes that. They brought on board a new chief operating officer in July, someone who used to be with VF Corp., North Face, Timberland -- so someone who has experience managing global footwear and apparel brands. So I think that will help bring some discipline into the equation.

Then he outlined a lot of different areas where they're trying to pivot now. They're trying to focus more on direct-to-consumer rather than wholesale, trying to focus on women and kids more than just being a men's brand. They're also looking to transition from being primarily an apparel company in the U.S. to a global apparel and footwear accessories company, but that also means you're going head-to-head directly against Nike, whose bread and butter is really footwear. Under Armour's experience with footwear still leaves a lot to be desired.

Gross: They have another Steph Curry shoe coming out, because the first one really knocked the cover off as well.

Kretzmann: [laughs] The amazing thing with footwear here is, Under Armour's footwear revenue was down 2% this quarter to $237 million. The same quarter, Nike's footwear segment was up 8% to $5.5 billion. So Nike is still dominating Under Armour. Under Armour doesn't have anything on Nike at this point. And really, Nike pulled a coup of sorts when Kevin Durant went to the Golden State Warriors. Now he's the face of the franchise. Steph Curry is not the face of the franchise anymore. So now that the Warriors won another title, his shoes really aren't picking up that much weight for Under Armour now.

Greer: David, when we were at CES a couple of years ago, I was remember there was a bunch of hubbub about this connected fitness idea at Under Armour, the idea that Under Armour, in a lot of ways, was almost becoming more of a technology company, and they were harnessing all of this data. What's going on with connected fitness?

Kretzmann: That network overall is still growing. They might even be above 200 million users on those three apps that they acquired. But it's not leading to any direct sales or profitability, and that's a big question mark. When you spend over $700 million on three apps, you go into debt for the first time in your company's history, they now have a net debt of almost $800 million, and they're still producing negative or inconsistent cash flow, that puts them in a pretty precarious financial position, especially now that they don't have that fast growth anymore. So in general, the connected fitness strategy that they have is a still a huge question mark when you have Nike that backed away from that strategy and said we're not going to be as hands-on with that; we're going to focus on our bread and butter.

Gross: I think Under Armour is right smack in the middle of an identity crisis. If you asked the average person, me being one of those average people, a couple of years ago, what were they, it would have been pretty easy to define them as a performance apparel, sports apparel maker. Now they're trying to be more things. It doesn't mean they won't get there, but during the transition, the identity just isn't there, and it's hard to find what they are. Are they an athleisure company? Are they a performance company? Are they Nike? Are they not Nike? So where this comes out, two years-plus, hard for me to predict. But the next few years are going to be a struggle as they try to redefine themselves.

Greer: Ron, we were talking before the show, I was talking about how kids these days, my boys, 9 and 11, and I go to the bus stop, and a lot of those kids are wearing either Under Armour or Under Armour-type athleisure wear. They don't wear jeans anymore, which is amazing to me. It's like heresy. What happened to jeans? Is that a good thing for Under Armour, in the sense that it's becoming this daily, you wear it to school? Or is it a bad thing in the sense that, actually, what they're wearing is the Kirkland version of Under Armour? Or is the idea that the brand has gotten diluted?

Gross: It's kind of both. By being something that you can wear every day to school, and not just the wicking material because you're going out to play a sport, you've brought in the market. But the downside is, now you're competing with everybody else who makes clothing to wear to school, or to wear in your everyday life. And that's a huge market that you're trying to break into and trying to steal share from. It's not easy.