What happened

Shares of Under Armour Inc (NYSE:UA)(NYSE:UAA) were up as much as 11.9% on Friday, Dec. 15. As of 1:35 p.m. EST, they've cooled off a bit, but are still up 8.7% (UA) and 7.7% (UAA). This big jump was primarily caused by a note released today by Stifel analyst Jim Duffy, who upgraded his rating on Under Armour from "hold" to "buy." Duffy also increased his price target to $17, $5 higher than the prior $12 target. 

So what

Duffy's vote of confidence was multi-pronged. To start, part of the upgrade was related to his expectations that the North American athletic apparel and footwear market will be more stable in 2018 than it has been for the past year or so. Since late 2016, weaker demand and fierce competition, combined with a spate of sporting goods retailers going out of business, has led to far more price competition among Under Armour and its two much-bigger competitors Nike Inc and adidas AG (ADR), which has played a major role in Under Armour's struggles over that period. The good news is that there is some evidence that demand is improving, and price competition is starting to abate as well. That should be a positive for Under Armour's (and its competitors') bottom line. 

A group of runners in Under Armour apparel and shoes.

Image source: Under Armour.

Additionally, the Stifel analyst expects to see Under Armour's strategy to drive down its expenses and improve its operations start paying off over the next year, though it could take more time for the company to get its inventory management house in order before the results show on the bottom line. 

Now what

The Stifel upgrade and note, like many Wall Street analyst notes, is based on relatively short-term things that may or may not pan out as expected. There is some evidence that demand and pricing for athletic apparel and footwear is improving, but a lot of unpredictable and unknowable factors could lead to 2018 sales being very different than expected right now. 

But where the analyst is spot-on is that much of Under Armour's success -- both over the next year and for the long-term -- boils down to how well management executes on its strategy to drive down costs, improve operations, and do a better job with things like managing inventory and capital allocation. For years, what in hindsight was an overly aggressive expansion of the company's cost structure was hidden behind Under Armour's remarkably strong sales growth. Unfortunately, when the competitive environment changed and growth stalled, Under Armour got caught with a bloated operating model the company had not grown into yet. 

Looking forward, the impetus is on founder and CEO Kevin Plank to prove that he can remain patient and disciplined with spending for growth. Plank controls around 60% of the voting shares in Under Armour, so investors in the company need to be confident that Plank is still the right man to run the company.

If Plank and his executive team can indeed "right-size" operations, Under Armour remains in a great position to grow much bigger and more profitable. But it's going to take time and a far more disciplined approach than the company has ever had to take before. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.