Why I don’t buy Under Armor shares

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Exercise clothing company shares Under protection (NYSE: UAA)(NYSE: UA) are currently 60% below their all-time highs reached in 2015. The stock has significantly underperformed the market during this time, and the company also struggled in 2020 with the pandemic. But now that vaccinations are on the increase, could it finally be ready to take the leap and create value for its shareholders?

As we’ll see, I don’t believe Under Armor is positioned to be successful. Indeed, it does not appear to be leveraging its strengths in a major emerging secular trend.

Image source: Getty Images.

Where vision is lacking

When buying stocks there is a lot to think about, including business models and valuations, but investors shouldn’t overlook secular trends. Not all companies position themselves equally to benefit from changes in consumer behavior, and I think that applies to Under Armor.

The company struggled in 2020. For the year, revenue was down 15% from 2019 and recorded a massive net loss of $ 549 million. That said, almost all clothing companies have struggled with the pandemic. Therefore, I will not focus on the challenges of last year. Rather, I’d like to focus on one of the only things that has worked well for Under Armor in 2020: connected fitness.

The company sells running shoes that connect to its MapMyRun app. With this platform, users can track their stats and connect with other users. At the start of the pandemic, this could have been the only highlight of the company’s activity. For example, in Q2 2020, the number of customers who completed their first connected workout increased 150% year over year.

It’s more than running shoes. Connected fitness is a deep consumer trend that should be an important consideration when fitness companies are developing their business strategies. For example, some people believe Interactive Platoon succeeded simply because the coronavirus closed the brick and mortar gyms, but I don’t think that’s true.

Consider Peloton’s revenue increased 99% in fiscal 2018 and 110% in fiscal 2019 – both periods before the pandemic. I believe the key to its success lies in how the company’s products integrate interactive social technologies into an otherwise solo exercise experience, which is turning out to be what consumers increasingly want. For years.

For this same reason, I believe Nautilus was simply a pandemic winner: its sales plummeted in 2018 and 2019 before skyrocketing in 2020, demonstrating that the coronavirus was indeed the main catalyst. But because connected fitness is a long-term consumer trend, Nautilus is astute at now emulating Peloton. The former is actively developing more connected fitness features in its equipment to maintain its new success. And you could say lululemon athletics is also looking into the connected fitness trend with its acquisition of MIRROR – a good move.

In contrast, instead of addressing this growing opportunity, Under Armor is stepping away from it. In December, the company sold its MyFitnessPal platform for $ 345 million. MyFitnessPal was the largest part of the connected fitness segment of its business. And it is obvious that connected fitness is not a priority part of its strategy, as MapMyRun’s income will now be bundled with the old “other” income.

Here are the meager goals

Under Armor’s stated goals for 2021 are simply to get their business back to where it was before. It forecasts double-digit year-over-year revenue growth in 2021, bringing it down to its 2019 figure of around $ 5.2 billion. And the company hopes its operating margin can reach double-digit levels in the long run, also what it has generated in previous years. For what it’s worth, management said their business is now poised to break even at around $ 4.7 billion in annual revenue, so its revenue target should help it. to achieve the profitability it aims.

To be clear, bringing your activity back to previous levels is a good thing. It’s just not an inspiring vision to get excited about. Maybe I would feel different if Under Armor stocks were trading at a discount. However, the chart below suggests that the market is already anticipating this recovery.

UA chart

Data by YCharts.

Under Armor is already trading slightly above where it traded for much of 2019. Therefore, it’s not even a short-term value opportunity. If you buy the stock today, you’re counting on it going back to what it once was and also expecting it to reach new heights.

Given its long history of underperformance, I’m not sure if I believe the company is about to do better than ever. In addition, since it is do not by doubling down on connected fitness now, I also don’t think it positions itself for unmatched performance in the market. For these reasons, I stay on the sidelines of the Under Armor stock.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.



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