Will Restructuring Plan Return Under Armour Inc to Long-term Growth?

Recently on Industry Focus, we welcomed a team of Fool.com contributors to the studio to talk about some of their favorite companies as part of our Pitch a Stock theme week.

In this consumer and retail segment, Steve Symington offers his take on Under Armour (NYSE: UA) (NYSE: UAA). Shares have been halved since the company encountered a major deceleration in its previously stellar growth, and founder and CEO Kevin Plank has implemented a restructuring plan to get the sports apparel brand back on track.

Find out how Under Armour has its fair share of opportunities and challenges on its path to recovery.

A full transcript follows the video.

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This video was recorded on Oct. 17, 2017.

Steve Symington: Hi! I'm Steve Symington, and I cover tech and consumer goods, and I'm pitching Under Armour today. Thanks to a slowdown in its corner of the American market and the bankruptcies of some of its largest retail partners, Under Armour has delivered two straight quarters of single-digit revenue growth. That might not sound so bad, but it came after over six years of at least 20% growth. As a result, Under Armour shares were down more than 50% over the past year. But I think the market is ignoring several catalysts that play in Under Armour's favor over the long term.

First, in response to those near-term headwinds, Under Armour has implemented a restructuring last quarter to streamline its business and better align its results toward its most promising growth opportunities. Now, in the near term, that means we should see a pivot toward Under Armour's higher margin direct-to-consumer business, where revenue climbed 20% year over year last quarter. In addition, investors seem to forget that Under Armour only just launched UAS, that's Under Armour Sportswear, late last year. That's a category that represents almost a quarter of total sales for its larger competitors like Nike and Adidas. But it's still only a sliver of Under Armour's total revenue stream. I think most compelling, Under Armour's international revenue climbed 57% year over year last quarter but still represents just a little over 20% of total sales.

Now, that leaves Under Armour with a massive runway for global growth that I think is severely underappreciated by more shortsighted investors today. We should get our first look at the progress Under Armour's made when it reports earnings early next month. But over the longer term, I think patient investors who buy Under Armour now and let these catalysts play out will be more than happy with their decision.

Shen: Steve mentioned the restructuring for this company as being a focus on the DTC channel, or the direct-to-consumer channel, their sportswear, the international growth. And their latest quarter, their shoe sales, which previously were considered a major growth catalyst for this company, actually declined as their apparel and accessories put up positive numbers. But when it comes down to it, in 2017, profitability is pretty much non-existent so far, and the company is getting a double whammy of declining margins, rising operating expenses. In the past, this is a company that was putting up quarter after quarter of incredible growth, almost like a young tech company. They were in a very favorable position, where they could spend freely to sustain that growth without really having to worry too much. But now, competition has stepped up, they lost some of their wholesale partners. What is your take, coming from the financials side, maybe someone who doesn't look at these companies all the time, what are some things you see here that might concern you or keep you positive?

Douglass: I would say, I feel very mixed about Under Armour. I've actually thought about purchasing the stock several times and I've never pulled the trigger. Certainly, since I thought about purchasing originally about a year ago, that's been great because I missed out on what's been something like a 50% loss. I think, for me, one of the areas that you're still seeing really impressive growth is international. I think it's 57% year-over-year, or something like that. That's really incredible, and it's great to see that there's such potential strength there, particularly given that it's such a small market for them still, there's so much growth ramp there.

I also like the push toward digitization. In financials, this is banks trying to put their apps up, it's fintech companies like Square. Here, there's such an opportunity with getting people's data and their information, and then being able to tailor offers based on that. Oh, hey, we noticed that you're running a lot, here are some running shoes. It's been a certain amount of time since you last bought some, maybe this is a good time to go ahead and give you a special offer to get you in the store and purchase a new one. I think there's a lot of opportunity there. Flip side -- growth is slowing. More intense competition. And frankly, it's still really expensive as a stock.

Shen: Yeah, I want to get to the valuation as a bit of a sticking point for a lot of people. But what you mentioned in terms of some of the things around understanding customers better, the digitization aspect, and I feel like Under Armour is in a unique position in that regard. The company is investing in a system where they can take everything they learn from the customer orders, the direct-to-consumer channel, that includes their online stores, but also, they have their brand house stores and the factory stores, too. Then, they also take their three fitness apps and all the data they get from that and roll it all together into a single system that hopefully, long term, you will hope to see better insights into how consumers shop, what products they want. And that's the kind of thing that I think can be a catalyst, but it'll take a decent amount of time for the results for that to really start coming in and coming to fruition.

Douglass: Yeah. I keep coming back to Starbucks, which initially had this app, and they were beginning with one email that went out to everyone, and they had, I don't know, I'm making this up, 400 emails that they sent. And eventually, they were able to get down to an incredible level of personalization. If Under Armour is able to do something similar, it's obviously going to be hard to get people to spend every day for Under Armour like for a coffee, but it's a much higher ticket item when they're able to do that. So I think that's a really incredible opportunity, if they can crack the code and really use data powerfully to understand how they can best serve people and grow demand.

Shen: Absolutely. Last point, coming to that valuation. The company decreased its growth guidance for 2017. That didn't help them. In terms of the valuation, this is a stock where you have to be willing to pay something like over 40x its forward earnings if you want to establish a position. The Under Armour bulls, optimists that we've spoken to, and we've heard from Steve, for example, they focus on some of the things like the strength of the brand, its very strong momentum in key segments like international. But are you convinced that's enough to justify this kind of premium?

Douglass: I think, for that multiple, I just can't. I don't see enough there to make me personally a buyer. Again, that's why each time, I get interested, because there's such a brand, there's so much growth opportunity. And each time, I end up backing away and saying, I think I can better spend my money elsewhere.

Shen: Sure. The thing for me that I'll say is, I'm very curious to see how they perform in this upcoming holiday season. Last year was not a good one for them. But management has spoken to some new strategies and efforts, they have their tiered pricing strategy, they think they're going to have a better view in terms of making sure their inventory is not going to be affected by weather, sometimes retailers will speak to that, how especially warm weather hurts them in terms of certain accessories and things along those lines. But I like to see if some of that data and some of this restructuring and these various efforts in terms of their retail footprint basically start to show results, even a little bit with this fourth quarter.

Douglass: Absolutely.

Michael Douglass owns shares of Starbucks. Steve Symington owns shares of Under Armour (C Shares). Vincent Shen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nike, Starbucks, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool owns shares of Square. The Motley Fool has a disclosure policy.