Is Under Armour Stock a Buy?

Once upon a time, Under Armour (UA 0.92%) (UAA 1.03%) was the rising star in the sports apparel industry. The company had an enviable brand and revenue growth to back that up. Then, a series of missteps and increasing competition took a toll on its game.

On this clip from Motley Fool Live recorded on Feb. 10, "The Wrap" host Jason Hall, Fool analyst Nick Sciple, and Fool.com contributor Danny Vena discuss Under Armour and what the future holds for this former promising upstart.

Jason Hall: So Under Armour, this is the, I guess at this point you could say beleaguered. Because this was a hot company for a decade. It was one of the best-performing, popular in the Foolish universe. The company was growing revenue like 20% every quarter. I think they grew it for like 220 quarters in a row. It was just like this crazy run. Maybe it wasn't that many, anyway it was like 50 quarters in a row. It was 12 years, 13 years, something like that. So it's just really long period of quarter-over-quarter growth. Then just the wheels came off.

Danny Vena: The wheels came off.

Jason Hall: They really did. Is just [laughs] like it hits some level of scale and just got bloated and the growth slowed and competition got hot in the US and then you saw some retail apocalypse. You saw a lot of athletic [retailers], Sports Authority was one. A few of those other athletic retailers that were big distributors, they went out of business.

I feel like the company made some grasp like they signed the deal with Kohl's (KSS 2.83%) as a distributor to replace some of that. Kohl's is a discounter right there. I mean, they're not like [The TJX Companies (TJX 0.45%)] T.J. Maxx here, but they're a discount retailer, so it's just hasn't been good.

But then the company announced that they made some changes. They brought in a new CEO. Plank, their founder, has been pushed back a little bit and it looks like this new CEO's making some moves. So stock jump today on earnings, even though revenues continued to fall in the U.S., and here was the upshot. The reason revenue is improved is because margins have improved, and the company has said, we're going to whittle down our retail footprint more. We're going to focus on profitability.

It sounds like they're trying to reclaim the brand as a premium brand, and they're going to focus on their own stores. They are going to focus on e-commerce. Here's what I want to do. I'm really doing some introspection. I think I might have sold too early. I sold sometime late last year. I thought this is a weed. I'm trimming my weeds here. I want to you guys to do some over-under here. Do you want to go first, Danny? I'm going to let you go first on this one, since Nick went first and last one. Over or under on Under Armour outperforming the market over the next five years.

Danny Vena: I am much like you, although I had less patience than you did. I sold out of my Under Armour shares several years ago. I think it was around the time they did the Kevin Plank, or not Kevin Plank. Anyway, they signed some big basketball player. I didn't like the way the metrics were going, everything was going in the wrong direction, and instead of leaning into e-commerce and expanding e-commerce, they expanded further into physical retail, and I thought, "Well, that is a recipe for destruction. Why would you do that?" All of the data shows that customers are increasingly relying on e-commerce and the company went the opposite direction.

That was a red flag for me, and so I just bailed on it. I would say overall, I'm still going to go with under. I don't think they've righted the ship yet, I don't think they have leaned into e-commerce the way they needed to as soon as they needed to, so I'm going to say under.

Jason Hall: Nick, what do you think here?

Nick Sciple: I'm going to say under too, maybe for a little bit different reason than Danny. I would just say, remember, David Gardner has a snap test. If you snapped your fingers and the company disappeared, would you notice? I don't think Under Armour passes the snap test anymore.

I don't mind that the brick-and-mortar focus or the way they're emphasizing that. I think that's the way lululemon (LULU 0.80%) has treated their brick-and-mortar store, I think it has been a big differentiator for them and has helped them build their brand. I think when I think about Lululemon, that's what Under Armour should have become. Under Armour made some strategic missteps, and if they had followed a very similar pattern to what Lululemon had done, maybe the story is different. But I don't think Under Armour passes the snap test. If I'm going to invest in this kind of active leisure wear, I don't know why I would own Under Armour instead of Lululemon.

Jason Hall: I tend to fall in the same camp. I think at the end of the day, yeah, it's still growing at low double-digit rates internationally. It's just so far behind in brand appeal to Nike (NKE -0.18%). Nike has just proven to be this incredibly durable brand. You start thinking about football -- soccer -- the football outside of the U.S. Adidas (ADDYY 2.20%) is another hugely successful brand. You think about leisure where Puma is more interesting than Under Armour.

There are some people that are hardcore sneaker guys that are going to buy, what's the basketball player, the Golden State's three-point guy...

Nick Sciple: Stephen Curry.

Jason Hall: Yeah. They're going to buy whatever Steph Curry's new shoe is. They're going to buy it. But they're also going [laughs] to spend a couple of 100 bucks on Lebron James' new Nike. They're going to do it. I just don't think that's an addressable market that's big enough, and I think they're going to continue to have a good little business. I think they're going to improve their margins. But I don't think they're ever going to get the operating leverage, because I don't think they're ever going to be big enough for that operating leverage to be a market-beating investment. Yeah. I'm going to pick the under here too. I really am.

Nick Sciple: You don't think the Virgin Galactic spacesuit market is really going to kick off this next leg of growth?

Jason Hall: [laughs] That's fantastic.