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3 Things Under Armour's New CEO Needs to Address Immediately

By James Brumley - Updated Oct 23, 2019 at 5:17PM

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The chief operating officer will move up to the CEO's office.

It's the end of an era for athletic apparel brand Under Armour (UA -2.49%) (UAA -2.83%), for better or worse. Founder and CEO Kevin Plank is stepping down after more than 20 years at his post, handing the reins to current chief operating officer Patrik Frisk. The switch becomes official on Jan. 1 of the coming year, and it should be relatively seamless, as Plank will remain on as executive chairman and the company's brand chief.

It won't be the same. As has been the case with so many other relatively young companies, like other founder-led companies, Kevin Plank has become part of Under Armour's ethos. On the flip side, a new personality at the helm -- assuming Plank's continued presence won't be a factor -- is an opportunity to inject some much-needed change into the organization's future.

From an investor's perspective, three tasks on Frisk's to-do list stand out among the rest.

Athletic apparel

Image Source: Getty Images.

1. Reset the corporate culture

Some of it was deserved, and some of it wasn't. Either way, Kevin Plank has been often criticized for cultivating a somewhat toxic corporate culture that doesn't compel longevity.

Case in point: Last year, Plank acknowledged and addressed the company's tolerance of using corporate credit cards to pay for executives' visits to strip clubs. Although he put an end to it, it took the powerful #MeToo movement to bring the problem to light and prompt change.

The company also struggles to keep key executives on board. Although the reasons for their departures aren't divulged, recent exits of a division president, a key sneaker designer, a human resources officer, and a vice president of global brand management all collectively send a message: Something's wrong.

2. Get a grip on debt, and selling expenses

In its early years, when it had to spend heavily to break into a market dominated by Nike (NKE -0.86%) and at least partially displace Adidas (ADDYY -1.91%), shareholders were tolerant of the expensive endorsement deals that brought high-profile athletes into the fold. At some point, though, greater scale and better brand awareness should reduce reliance on celebrity spokespeople and big spending. They haven't.

For perspective, Under Armour's selling and administrative expenses amounted to 42% of the brand's total revenue, versus Nike's comparable figure of 32%.

Under Armour's $703.8 million worth of long-term debt -- plus another $208.3 million in other long-term liabilities -- hasn't been easy to field, either. The company spent $33 million on interest payments last year, dragging the organization considerably deeper into the red.

3. Win back the hearts and minds of consumers and retailers

Finally, the underpinnings of Under Armour's ongoing loss of growth momentum are difficult to pin down. In the end, though, the company just doesn't appear to be making and marketing products consumers want. That challenge is twofold, however, in that it forces retailers to rethink how much focus they want to give the brand going forward.

"We think Under Armour will struggle to gain shelf space at premium shoe stores like Foot Locker and Finish Line in the U.S. as Under Armour lacks the styling and innovative product of some competitors," wrote Morningstar's David Schwartz in August, adding, "We believe Under Armour lacks the design talent, marketing, and resources to take share from Nike and Adidas in international markets and athletic shoe categories."

Schwartz's stance echoes those voiced by other analysts in May, following Under Armour's disappointing first-quarter results. Susquehanna Financial Group's Sam Poser wrote at the time, "Our industry checks indicate a lack of enthusiasm and interest for Under Armour product from retail partners. With Nike firing on all cylinders and heritage brands such as Champion, Fila and others reemerging, we see little sign Under Armour will reclaim lost shelf space anytime soon."

Looking ahead for Under Armour

Patrik Frisk is lucky in most regards, in that he's been handed a company that's performing reasonably well and doesn't need any major overhauls. His situation is a sharp contrast to the mess that General Electric CEO Larry Culp was handed a year ago, or the challenge new Rite Aid CEO Heyward Donigan now faces.

Whether Frisk can return Under Armour to its former greatness as a brand, however, still remains to be seen. Plank is still clearly around and very much involved. That could make it tough for a new leader to lead.

Nevertheless, there's one thing working in favor of Frisk and his management team. He joined the company only a couple of years ago, and a significant exodus of other executives means those replacements haven't likely fostered any particular loyalty to Plank or the way things used to be.

James Brumley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

Under Armour, Inc. Stock Quote
Under Armour, Inc.
$9.95 (-2.83%) $0.29
Under Armour, Inc. Stock Quote
Under Armour, Inc.
$9.01 (-2.49%) $0.23
General Electric Company Stock Quote
General Electric Company
$79.92 (-1.42%) $-1.15
NIKE, Inc. Stock Quote
NIKE, Inc.
$117.04 (-0.86%) $-1.02
Rite Aid Corporation Stock Quote
Rite Aid Corporation
$10.51 (-5.14%) $0.57
adidas AG Stock Quote
adidas AG
$86.35 (-1.91%) $-1.68

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