One of the most important skills a successful investor can possess is the ability to say no to potential investment opportunities that do not fit certain required criteria. This saves valuable time and allows you to quickly move on to the next idea.
While it's hard for anyone to say that they'll never do something, owning Under Armour (NYSE:UA) (NYSE:UAA) stock comes close for me. Since reaching an all-time high in September 2015, the athletic apparel maker has lost nearly 80% of its value, and it continues to face some serious challenges.
Let's dive into why I'll pass on Under Armour.
Where's the moat?
Warren Buffett once said: "If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes." I've found that to be an extremely helpful mental screen to use before making a buy decision. In order for there to even be a remote possibility of owning a stock for that long, the company must have a competitive advantage, and I don't believe Under Armour has one.
During the second quarter of 2020, revenue generated from apparel accounted for 64% of Under Armour's net sales. Apparel sales at Nike, on the other hand, amounted to just 27% of total revenue in the quarter ending May 31. Nike's strength in footwear, where it gets most of its revenue, provides it with a competitive advantage, as footwear has higher barriers to entry and requires technical and innovative expertise. Apparel is just the opposite, with seemingly nonexistent barriers to entry, opening up Under Armour's business to more competition.
This is evidenced by looking at return on invested capital (ROIC), as shown below. Even before the coronavirus pandemic hurt both businesses, you can see that Nike and Under Armour were trending in different directions. For Nike, a consistent ROIC over 20% that rises steadily demonstrates a widening competitive advantage. That is not the case for Under Armour, whose declining ROIC is indicative of management's ineptitude at capital allocation.
Missing the athleisure trend
In addition, Under Armour completely missed the athleisure trend. The company's earlier products were geared mainly toward football players, but as companies like Nike and lululemon athletica started making athletic clothing that combined comfort and fashion, Under Armour failed to expand in this category.
Lululemon's focus on athleisure, coupled with its growing brand recognition, is one reason why its stock is up 51% this year (through Thursday's close). And Under Armour's lack of these characteristics is solely why its stock is down about 50%.
From an investing perspective, the prudent move is to stay far away from companies that fail to catch on to trends happening in the marketplace. As a long-term investor, I want to partner with management teams that embrace and deliver to changing consumer tastes.
Under Armour's founder, Kevin Plank, and CFO, David Bergman, recently received Wells Notices from the Securities and Exchange Commission relating to accounting irregularities from late 2015 through 2016. The company is being investigated for possibly moving sales around from quarter to quarter in order to make financial results appear smoother.
Although Under Armour denies any wrongdoing, it's still not a good look for a business that has already been struggling over recent years. It makes you wonder just how bad sales actually were that it would have led to a manipulation of the numbers.
On to the next one
The lack of a competitive advantage, missing the boat on a massive consumer trend, and an open accounting investigation all lead me to say no to Under Armour's stock. What was once a Wall Street darling has since been on a downward spiral as brand awareness diminishes.
In Warren Buffett's experience, "turnarounds seldom turn." While Under Armour may look cheap compared to peers, it's best to avoid this value trap.