Please ensure Javascript is enabled for purposes of website accessibility

After a Year of Rehab, Under Armour Is Poised for a Major Comeback

By Dennis Hobein – Updated Jun 21, 2021 at 11:53PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Off-trend products and an underperforming digital channel opened the door for rival Nike to seize market share. Now Under Armour is punching back in a big way.

The sports world has produced some of the most dramatic comeback stories ever told. While this story doesn't involve an athlete improbably returning to glory from a devastating injury, it does examine the revival that's unfolding at athletic apparel maker Under Armour (UA 1.52%) (UAA 1.08%).

Like an up-and-coming sports star, Under Armour was a fan favorite among growth investors when it steadily produced quarterly revenue increases of 20% to 30% in the 2012-2016 timeframe.

Just as Under Armour's rise made it a viable competitive threat to athletic footwear and apparel powerhouses like Nike and Adidas, the company lost its way and hit rock bottom in the early days of the pandemic.

Boxer practicing on a punching bag.

Image source: Getty Images.

Meanwhile, rival Nike ran up the score on the down-and-out company, capitalizing on rising enthusiasm for running, outdoor activities, and working out at home.

The divergence in top-line performance between the two companies has been striking, clearly pointing to significant market share gains for Nike over Under Armour. Excluding the most recent quarterly results for each company, Nike averaged a 1.2% year-over-year revenue decline over the past six quarters, compared to a 10.5% drop for Under Armour.

Consequently, Under Armour's stock plummeted to multi-year lows last May as it fell further behind the competition.

A knockout in slow motion

Under Armour's downfall didn't happen overnight. Rather, like a boxer taking punches over several rounds before eventually falling to the mat, Under Armour's miscues took their toll over time.

The first signs of trouble emerged in early 2017, when its quarterly top-line growth rates dove to mid-single-digit levels. Under Armour's once-formidable North America segment (~60% of total sales) became an achilles heel as its sports performance-based apparel fell out of favor. 

Unwilling to adapt to the consumer trend toward everyday athleisure wear, such as the products sold by lululemon athletica, the North America segment experienced sales declines of 5% and 2% in 2017 and 2018, respectively.

Simultaneously, Under Armour fell behind the curve with its digital platform. This would factor into the company's underperformance when COVID-19 swept across the U.S. last spring, which turbo-charged the acceleration toward e-commerce.

On the surface, Under Armour's 40% e-commerce growth in 2020 looks solid. However, when stacked up against an average of 74% digital sales growth for Nike over the past four quarters, the results lose their luster.

Instead of prioritizing its e-commerce platform, the company became more reliant on its wholesale business. Flooding the shelves of Dick's Sporting Goods and Kohl's with unpopular products turned out to be a disastrous move, though -- and not just for Under Armour.

During Dick's Sporting Goods' fourth-quarter 2018 earnings conference call, former CEO Ed Stack singled out Under Armour as a cause for the company's revenue shortfall. He stated that growth in other brands was "offset by weakness in the Under Armour brand," adding that Under Armour sales were affected by "expanded distribution."

The end result was that Under Armour's wholesale customers scaled back on orders, causing prices and margins to slide. At that point, it became clear that Under Armour needed a new vision.

A tougher and leaner company returns to the ring

While taking a beating during the 2017-2019 span, gross margin eroded to the 45% to 46% range. Determined to return as a stronger and leaner company, Under Armour went back to the drawing board in 2020.

The company devised a multi-pronged approach that includes broadening its appeal in popular categories like running, relaunching an improved North American digital channel, implementing supply constraints to better align distribution with demand, and a $550 million restructuring program.

Although sales growth remained elusive during the pandemic, early signs emerged last year that the comeback plan was working. Most notably, gross margin returned to around 49%.

When Under Armour reported strong first-quarter earnings on May 4, 2021, it became evident that the turnaround was fully in motion. The upswing in performance caught analysts off-guard as EPS of $0.16 and revenue of $1.26 billion easily exceeded the $0.04 and $1.12 billion forecasts.

More importantly, its North America business rebounded with a 32% sales increase, while the e-commerce channel generated Nike-like growth of 69%, thanks to improved personalization capabilities. Additionally, gross margin jumped by 370 basis points year over year to 50%.

The company believes this is just the beginning of its resurgence, as it lifted its FY21 revenue growth forecast to a high-teen percentage range compared to its prior expectation of a high-single-digit rate increase.

Under Armour still has plenty of work ahead, but it's in a better position to go toe-to-toe with Nike again. This improved competitive standing should have Under Armour's beleaguered investors enjoying a comeback of their own, too.

Dennis Hobein does not own any of the stocks mentioned. The Motley Fool owns shares of and recommends Lululemon Athletica, Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Under Armour (C Shares) Stock Quote
Under Armour (C Shares)
$6.69 (1.52%) $0.10
Under Armour (A Shares) Stock Quote
Under Armour (A Shares)
$7.48 (1.08%) $0.08
Kohl's Stock Quote
$27.61 (0.22%) $0.06
Lululemon Athletica Stock Quote
Lululemon Athletica
$310.05 (0.73%) $2.25
Nike Stock Quote
$91.10 (2.77%) $2.46
Dicks Sporting Goods Stock Quote
Dicks Sporting Goods
$111.67 (1.46%) $1.61
adidas Stock Quote
$60.66 (-3.39%) $-2.13

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/06/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.