"Never bite the hand that feeds you" is a centuries-old truism, but when that hand has been trimming down the portions, it is understandable that one might be tempted to give it a little nip. Case in point: Dick's Sporting Goods (NYSE:DKS), which reported tepid numbers for its fiscal second quarter on Wednesday, and which pointed to major supplier Under Armour (NYSE:UA) (NYSE:UAA) as a key cause of that.
In this segment from the Market Foolery podcast, host Mac Greer brings senior analysts Matt Argersinger and Aaron Bush to the table to talk about the troubled apparel maker, the last surviving big specialist retailer in the sporting goods niche, and the increasingly complex relationship between them.
A full transcript follows the video.
This video was recorded on Aug. 29, 2018.
Mac Greer: Guys, let's start with a bit of a kerfuffle in the exciting world of sporting goods. We have Dick's Sporting Goods and Under Armour. Dick's reported earnings which I think it's fair to say underwhelmed investors. Shares of Dick's down around 7% at the time of our taping. Matt, Dick's blaming Under Armour for part of that weakness. Under Armour shares, down more than 3% right now. What's going on here?
Matt Argersinger: Yeah, Mac, you don't really see this very often, where a company, a retailer like Dick's, calls out one of its key suppliers, one of the companies that really fills its channel with the products that customers want. In this case, Dick's is calling out Under Armour and saying, I'll just quote CEO Ed Stack, he said: "As expected, sales were impacted by the strategic decisions we made regarding the slow-growth, low-margin hunt and electronic businesses, which accounted for nearly half of our comp decline. In addition, we experienced continued significant declines in Under Armour sales as a result of their decision to expand distribution."
What we know is, a few years ago, Under Armour really started expanding beyond the "premium" sports apparel companies like Dick's Sporting Goods, and going to companies like Kohl's or other more-discount retailers. In Dick's mind, that says: "People used to come to Dick's to buy Under Armour specifically. Now, they know they can get the same product or same item cheaper at Kohl's. So, why spend money at Dick's?"
It's just interesting to see. I think Under Armour is down in sympathy, because what they're suggesting is, not only are you cheapening your own brand by expanding your distribution so well, it actually is not working. If you look at Under Armour's sales last quarter, revenue in North America was up just 2%. If Under Armour has expanded out its reach in all these different channels, it's really not working. I think that's the reason why the market's suddenly taking Dick's for its word.
Aaron Bush: Yeah, Under Armour is definitely cheapening its brand, and it's showing through Dick's and the fact that people are leaving Dick's to buy Under Armour more cheaply at other places. If Under Armour truly had pricing power because of a stronger branding influence, we wouldn't be seeing this at all. Part of that is operational issues that they've dealt with. Part of it is, they just haven't done a good job rebounding from that. The stock actually has roughly doubled or so from its lows back in, I think it was around November. And we are seeing margins slightly tick up, revenue growth slowly tick up, but it's still really bad. Seeing these results coming from Dick's kind of proved that the badness isn't over yet. They're still wading through a lot of issues.
Greer: OK, so let's work through some of that badness. Looking forward at both of these companies, looking at Dick's and Under Armour. It sounds like the low-cost genie is out of the bottle a bit with Under Armour, if I can get it at Kohl's. What do you do if you're Under Armour going forward here?
Argersinger: One thing that's working for them is the DTC, direct to consumer, avenue. Either the Under Armour wholesale retail stores outlets, or their online commerce. That's working for them internationally. It's working. Growth there is still growing around 20%. The brand has legs. I think it's just a matter of, in North America specifically, which is our largest market, as Aaron has said, it doesn't have the allure anymore. I hate to say it, but if I'm going to Kohl's to buy Under Armour, maybe I should just buy Russell Athletic at my local Walmart. I'd save even more money.
Greer: So, you have a problem with Russell Athletic?
Argersinger: [laughs] No! I like Russell Athletic! In fact, I own a lot of Russell Athletic! I'm just saying, I think in consumers' minds, those brands are now a little more equal than they used to be. I'm no longer willing to pay a premium for Under Armour.
Bush: I also think Under Armour needs to do a better job of focusing. In the past, we've seen them spend hundreds of millions of dollars on fitness apps, which was part of a broader strategy. They expanded into more casualwear, where you could buy a sweater or something, like an Under Armour sweater that's $150. Naturally, that didn't really stick. [laughs] So, there are a lot of discounts coming from there. I know they've had issues with certain sports and success in other sports. But if they really want to revitalize their brand back to a point where they can have pricing power, they really need to focus in the areas where people respect them the most and where they can have that pricing power. The more random apparel items they throw out there, of course they're not going to be super successful and bringing back pricing power. So, watching them pick and choose the areas that they want to double down on, I think, will be an important indicator.
Greer: One name that we have not said throughout this discussion is Nike. Is it fair to say that Nike does not have this same problem? I know Under Armour, over the years, they've recoiled at that term "athleisurewear" -- the idea that, a lot of people, when they're buying their Under Armour, they're not really working out. They're just kind of putting it on and going to school, doing their thing. Nike has a lot more pricing power?
Argersinger: I believe so. I think Nike's done a better job advancing its brand a little bit lately. Although, you could go back a year or two ago and Adidas was really cleaning both Nike and Under Armour's clock. It just shows you that apparel is very cyclical. People like what they like when they like it. Under Armour, for a lot of the reasons Aaron's talked about, it's just not been in vogue like it has been in recent years.
Aaron Bush owns shares of Under Armour (A Shares) and Under Armour (C Shares). Mac Greer has no position in any of the stocks mentioned. Matthew Argersinger owns shares of Under Armour (C Shares). The Motley Fool owns shares of and recommends Under Armour (A Shares) and Under Armour (C Shares). The Motley Fool recommends Nike. The Motley Fool has a disclosure policy.