Can Under Armour Make a Quick Turnaround?

Shares of athletic apparel maker Under Armour (UA 0.61%) have lost nearly 70% of their value over the last five years, as the company has weathered executive shake-ups, brand missteps, and an extremely difficult competitive environment. Below, Motley Fool contributor Asit Sharma digs through the company's financial statements to determine if it can quickly turn its fortunes around.

A full transcript follows the video.

Feroldi: Here, Asit, let's look at some numbers.

Sharma: Sure. Here we're going to take a look at the last three years. I think this is a good look because, as Brian mentioned, the company's had some stumbles. It's floundered in a few important markets; the college athletics market, it missed the athleisure trend, although it's coming back now. Brian talked about the wearables business not being a great decision, these stumbles are reflected in the last few years of results. Revenue hasn't been that bad, and I apologize for this. We did one of this a couple of weeks ago, Brian, where we had a company that breaks out all these quarterly columns in their annual report. I will make up for that by telling you what we're looking at.

What we're trying to focus on is this part of the screen right here, so the three years ended December 31st, for 2019, '18, and '17. Not bad revenue growth, really, in the consumer goods business. Not quite like Nike's, but this is a company that grew at a much faster rate until it hit some brand problems, and pretty stable margins. As you can see that over here, that's the cost of goods sold on this line, this is the gross profit. A little bit of step-up in general and administrative expenses. This is basically overhead. What we see here is the effect of restructuring and brand impairments on the bottom line, at least on net income base. You see the company had, actually, an operating loss in 2017, the same thing in 2018. A slight loss here, but no impairments.

These lines are restructuring impairments, etc. When you look at net income, it's not been that rosy for the last couple of years. How does this translate into cash flow by comparison? Well, as Brian mentioned, there is a business here. If we're focusing on cash flows, they've been pretty solid. This is the last two years. Sorry, it's a balance sheet, let me make sure I get that. Here we are looking at those last couple of years of losses, those operating losses translated into net income losses. Still, through that, you see that operating cash flow is growing, and it's pretty stable, $500 million last year on $92 million of net income.

The outlay for property and equipment has flopped around, but not overly big for a company that has a pretty decent store presence still, although it's trying to increase those direct channels. The company is generating some free cash flow, and cash balances have been growing. They really come along, and that's reflected in the balance sheet. I know we're doing a half-hour session, so I have to be quick. I wanted to take a look at the most recent quarterly report. Here you see something that doesn't look all that different from Nike's consolidated statement of operations. This is a pandemic report where sales are markedly down year-over-year.

So this was the prior quarter, about $1.2 billion sales versus just $708 million in sales this quarter. So the company has got a pretty big loss in its most recent quarter, but that's not very different than Nike, which has also pulled up here. Nike also had a 38% drop in its revenue. Of course, it's a much bigger company, so $10.2 billion of revenue in one quarter versus $6.3 billion. The difference in these two companies is the prior period for Nike was extremely profitable. So if you look at the year-ago period, it had almost $1 billion in profit. Just going back here to the screen, taking a look at what happened with Under Armour, if you compare it to the same quarter last year, they again, were losing money.

So what we're seeing in the books is a company that is trying to reformulate its brands. It's trying to optimize its revenue, trying to increase direct sales, which are much more profitable, and it can do it through the e-commerce channel, trying to diversify into an international business, as Brian mentioned, and it's taking some time and the stock price, I think, has suffered. Maybe Brian can show us that in a minute here, but we're looking at a company that has had some missteps. Finally, let's just take a quick look at the balance sheet, which is on the same statement in the most recent quarter, and you'll see it's pretty solid. To go back to your theme Brian, there's a business here. We've got about $3.1 billion in working capital as of June 30th, 2020.

I will point out that inventory is bumping up because sales are slowing, so that's something to watch if you're a shareholder in the coming quarters. Is that inventory going to normalize or is it going to keep bumping up? They were trying to fix their inventory problems before this and COVID has not helped, but against those current assets, only about $1.6 billion in current liabilities, not a lot of long-term debt on the books in comparison. If you're the type of person who likes to look at a net debt type of look, not too bad, they are positive on that. In other words, they've got $1.1 billion in cash versus about a little bit less than $1 billion in long-term debt.

So, a solid picture on the balance sheet, not a super one, but certainly not a company that you would say, they're not going to be able to make a comeback. These problems are more about marketing, brand, the investments that the company is making in operations versus a turnaround situation where you can see that writing's on the wall and they're not coming back. They could make a comeback. I just don't know if it's going to be an overnight comeback, Brian, from the financials.