If a new year brings new beginnings, then Under Armour (UA +1.31%) (UAA +1.27%) must have been delighted to turn the calendar to 2018 -- because 2017 was a disaster for the company from start to finish. Not only did its stock drop 50%, but a number of public relations blunders and operational errors let its competition skip ahead of it.
Among the goodwill-sapping gaffes, CEO Kevin Plank called President Trump "a real asset" at a time when protests were raging against over his Muslim travel ban. That comment undermined the company's efforts to cross over to streetwear and fashion, as Trump is particularly unpopular among young urbanites. In the spring, the company confirmed that the Curry 3, its signature shoe from its highest-profile athlete, NBA star Steph Curry, was a flop, and it reported the first quarterly loss in its public history. The company continued to lose ground to Adidas (ADDYY 3.47%) throughout the year, and saw the departure of several, high-level executives. Questions also arose about Plank's focus on the company due to his other business interests. When Under Armour's third-quarter report rolled around, its problems became crystal clear. The sportswear maker reported its first-ever decline in revenue. Overall sales dropped 5% and North American sales dropped 12% as the company's efforts to replace bankrupt retail partners like The Sports Authority fell short. Under Armour again slashed its guidance for the year.
Analysts forecast breakeven earnings and flat revenue from the key fourth quarter of 2017 when the company reports in the coming weeks. So based on how it's limping into 2018, it seems almost certain that this year won't be Under Armour's best ever. The key question for investors may be if 2018 will be an improvement. Here's what to watch for early indicators on that score.
Image source: Under Armour.
Repairing the brand
While changes in the retail industry may explain part of Under Armour's problems at home, brand weakness may be the greater issue, as the company has lost considerable market share to Adidas. Plank's comments, the poorly received Curry 3, and comments from Nike spokesman and Curry teammate Kevin Durant dissing the brand, all helped create something of an albatross around the company's neck. In Piper Jaffray's semiannual survey of teens last fall, respondents called Under Armour an "old brand," and said they were instead embracing Adidas and Vans.
With domestic sales falling by double-digit percentages, it's clear that the company needs to do something to jolt sales. Look for a new marketing campaign or a potential blockbuster product to change the buzz around the brand, as the company desperately hunts for new narrative. In theat vein, its partnership with rapper ASAP Rocky -- reminiscent of Adidas's tie-up with Kanye West -- could yield promising results.
Direct-to-consumer
Alongside declining North American sales, wholesale revenue has also fallen by 13% in the most recent quarter. As traditional partners like The Sports Authority have gone out of business and others, like Dick's Sporting Goods, have seen sales growth slow, the company has reached out to new retailers like Kohl's and DSW. However, critics have complained that selling through those discount outlets hurts Under Armour's image as a premium, performance brand.
Pivoting to the direct-to-consumer channel may be the best solution; revenue in that segment of the business grew 15% in the most recently reported quarter, though the company forecast a slowdown for the fourth quarter, when it cut back on inventory to avoid discounting.
Nike (NKE 1.95%) shares got a boost in October after it announced a plan at its own Investor Day conference to focus more on the direct-to-consumer channel and on partnerships with retails willing to build out a distinct Nike brand experience. Under Armour may want to consider a similar strategy that will give it more control of its brand and allow for better integration of its traditional and e-commerce strategies.
Cost-cutting
Finally, Under Armour released a restructuring plan to cut costs and bring the business more in line with a realistic growth trajectory. In its Q2 earnings report, the company said that plan would lead to $110 million to $130 million in charges as it closes facilities, pays employees severance, forks over contract-termination fees, and takes inventory charges. It said it would take those charges in fiscal 2017, which could set it up for improved margins this year, but that will depend on top-line growth. A key goal for the company in 2018 will be right-sizing the cost structure of the business. Plank acknowledged that the company had gotten "cocky" with earlier predictions that it would reach $7.5 billion in revenue and $800 million in operating income by 2018. That forecast turned out to be wildly inaccurate.
This is shaping to be a rebuilding year for Under Armour, but the company can take key steps to get itself on a path for long-term growth. For investors, the good news is that analysts' expectations are so soft, so the stock could recover somewhat if the company can surmount the low bar Wall Street is setting for it. Right now, analysts expect revenue growth of just 4.4% for the year and EPS to increase from $0.19 to $0.24. Under Armour's 2018 guidance, expected in its upcoming earnings report, should go a long way toward determining the stock's fate this year. Keep an eye on what that report says about the topics discussed above as well. If Under Armour can execute on those opportunities, the stock should get back on the right track.
