Under Armour: Down 67% Since June 2015 – Under Armour, Inc. (NYSE:UAA)


The year of 2017, has been tough and painful for shareholders of performance athletic apparel, footwear, and accessories maker Under Armour (UAA). The past few years have been painful. The owners of its competitor Nike (NKE) have fared much better. Under Armour’s bondholders have felt some pain too.

Investors have punished Under Armour as it has vastly under-performed the S&P 500 and competitor Nike (NKE) in 2017. Year-to-date Under Armour is down over 56% as sales growth has disappointed and guidance was reduced. By comparison, the S&P 500 measured by the SPDR 500 ETF (SPY) is up over 15%, and Nike is up over 8%, see chart.

ChartUAA data by YCharts

It should not be a surprise that executives on the third quarter conference call mentioned disappointment in the 2017 financial results. Executives have suffered lost wealth and compensation as the share price has declined and financial performance lagged benchmark targets.

ChartUAA Price data by YCharts

The balance of the year could be difficult for the shares to gain traction with tax loss selling season approaching. It might be coincidence, but the share price and market capitalization loss appear to have started shortly after the Board approved a new clbad of stock back in June 2015, see chart below.

ChartUAA data by YCharts

Key Financial Metrics

Sales & Net Income

Under Armour reported sales for the nine months ending September 30, 2017, of $3.611 billion compared with $3.530 billion for the same period in 2016. For the third quarter ending September 30, 2017, sales fell from the 2016 level of $1.472 billion to $1.406 billion. Nike reported sales for the first quarter ending August 31, 2017, of $9.070 billion compared with $9.061 billion the prior year.

Under Armour reported $54.242 million of net income for the third quarter of 2017 versus $128.225 million in the 2016 quarter. Net income for 2017 third quarter was 3.9% of revenues versus 8.7% in 2016.

Nike reported $950 million of net income for the quarter ending August 31, 2017, versus $1,249 million during 2016. Net income as a percentage of revenue was 10.5% in 2017 versus 13.8% in 2016.

Nike has generated the better financial performance of late.

Balance Sheet

Under Armour reported $771 million of long-term debt versus $2,100 million of shareholder equity, for a debt to equity ratio of 36.7%. Nike reported long-term debt of $3.472 billion compared with $11.993 billion worth of shareholder equity, for a debt to equity ratio of 29%.

Nike has the stronger balance sheet.

Net Interest Expense % of Revenues

Under Armour’s had net interest expense of $9.5 million on $1,406 million in revenues, with interest expense accounting for 0.68% of revenues. Nike’s net interest expense was $16 million during the most recent quarter versus revenues of $9,070 million. Therefore interest expense accounted for 0.17% of revenues.

Nike’s shareholders pay less in interest expense leaving more monies available for shareholders and reinvestment.

Hindsight: The 2015 Board Decision Was A Sign Of Problems Ahead

The Board approved the new clbad of stock during June 2015 which enabled Mr. Plank to maintain voting control. Shortly after that decision the share price and the market capitalization began to decline. Chart below shows the market capitalization since January 1, 2015. Close to $16 billion of wealth has been lost since the peak.

ChartUAA Market Cap data by YCharts

Back in June 2015, the Board approved a new clbad of stock, and since then investors have seen a mbadive wealth destroyed as the chart above shows.

In June 2015, the Company’s Board of Directors (the “Board”) approved Articles Supplementary to the Company’s charter which designated 400.0 million shares of common stock as a new clbad of common stock, referred to as the Clbad C common stock, par value $0.0003 1/3 per share. The Articles Supplementary became effective on June 15, 2015. In April 2016, the Company issued shares of Clbad C common stock as a dividend to the Company’s holders of Clbad A and Clbad B common stock on a one-for-one basis. The terms of the Clbad C common stock are substantially identical to those of the Company’s Clbad A common stock, except that the Clbad C common stock has no voting rights (except in limited circumstances), will automatically convert into Clbad A common stock under certain circumstances and includes provisions intended to ensure equal treatment of Clbad C common stock and Clbad B common stock in certain corporate transactions, such as mergers, consolidations, statutory share exchanges, conversions or negotiated tender offers, and including consideration incidental to these transactions.

On March 16, 2016, the Board approved the issuance of a new clbad of stock. The chart below shows the share price and market capitalization performance since the board’s decision. Investors have not been impressed.

On March 16, 2016, the Board of Directors approved the issuance of the Company’s new Clbad C non-voting common stock, referred to as the Clbad C stock. The Clbad C stock was issued through a stock dividend on a one-for-one basis to all existing holders of the Company’s Clbad A and Clbad B common stock. The shares of Clbad C stock were distributed on April 7, 2016, to stockholders of record of Clbad A and Clbad B common stock as of March 28, 2016. Stockholders’ equity and all references to share and per share amounts in the accompanying consolidated financial statements have been retroactively adjusted to reflect this one-for-one stock dividend.

A shareholder may have a vote, but it does not matter.

Kevin Plank, our Chairman and Chief Executive Officer controls the majority of the voting power of our common stock.

Our Clbad A common stock has one vote per share, our Clbad B common stock has 10 votes per share and our Clbad C common stock has no voting rights (except in limited circumstances). Our Chairman and Chief Executive Officer, Kevin A. Plank, beneficially owns all outstanding shares of Clbad B common stock. As a result, Mr. Plank has the majority voting control and is able to direct the election of all of the members of our Board of Directors and other matters we submit to a vote of our stockholders. The Clbad B common stock automatically converts to Clbad A common stock when Mr. Plank beneficially owns less than 15.0% of the total number of shares of Clbad A and Clbad B common stock outstanding and in other limited circumstances. This concentration of voting control may have various effects including, but not limited to, delaying or preventing a change of control or allowing us to take action that the majority of our shareholders do not otherwise support. In addition, we utilize shares of our Clbad C common stock to fund employee equity incentive programs and may do so in connection with future stock-based acquisition transactions, which could prolong the duration of Mr. Plank’s voting control.

Mr. Plank’s adjusted total compensation for 2016 was $33,575 with $26,000 in base salary. Investors might have had an issue with the new clbad of stock and voting control. However, investors should not have a problem with the compensation paid the CEO.

The level of compensation earned by Mr. Plank demonstrates that maintaining voting control might be a good thing for shareholders. Mr. Plank over the past decade, or so, has built an amazing company. Numerous firms have been pressured by activists’ investors only to watch the share price and market capitalization fall and then the activist exit the position. Mr. Plank is looking at the long-term health of Under Armour being it founder and may make decisions not fully appreciated by investors in the short-term. Hopefully, the financial performance will improve in 2018 and beyond.

ChartUAA Revenue (NYSE:TTM) data by YCharts

Bondholders’ confidence has been slightly shaken

In June 2016, Under Armour sold $600 million in 3.25% Senior Notes due 2026.

The bond price has weakened, though not anywhere near the decline of the stock price. It does appear that bondholder confidence has been slightly shaken by the third quarter financial performance and guidance reduction.

Thoughts on the Third Quarter Conference Call

The CEO of Under Armour mentioned the following during the conference call.

We’ve not performed to the level we originally aspire to. Some of this imbalance is due to things in our control like product, consumer connectivity and structural changes and some things from out of our control, like the macro environment and shifting consumer behavior. Amid this backdrop, 2017 has been a reset for Under Armor and while certainly a challenging year, it is a time that has taught us invaluable lessons, strengthened our results and will prove to be a year that helps redefine us as a brand company and culture.

It is comforting that the CEO acknowledged the problems facing the firm and that there is a disappointment in the results. 2018 will be a key year for financial performance.

What should an investor do?

Stock investors should keep an eye on the bond price for a sign of waning confidence. Investors seeking exposure to Under Armour may consider purchasing the 3.25% bond due 2016 and use the interest earned to build a position in the shares. The more speculative investor may consider selling at-the-money puts to purchase the shares at a lower than market price if badigned or earn the option premium. The highly speculative investor might consider the common shares looking for a short-covering rebound near year-end.

It is tough seeing the shares trade much higher than $15 to $17 over the next three to six months. However, from $12.72 a return to $15 would be a 17.9% gain and at $17 the gain would be 33.6%. That would not be too shabby a return.

Disclosure: I am/we are long UAA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Also short call options and may sell put options for income.

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