Brean Downgrades Under Amour, But Still Likes Its Long-Term Story

Under Armour Inc UA announced the departure of its Chief Merchandising Officer Henry Stafford and Chief Digital Officer Robin Thurston in July. Brean Capital’s Eric Tracy downgraded the rating for the company from Buy to Hold. The analyst expressed concern regarding risks to the model in view of the prominent departures in recent months and the ongoing consolidation in athletic retail.

Analyst Eric Tracy said that apart from the “heightened risks” to the model, the current premium valuation left “little room for error.”

Leadership Turnover

The latest announcements, along with the prominent departures in recent months, created executional risk in the near term. “While UA has generally quickly filled key positions with highly talented individuals (see CFO Chip Molloy as prime example), organizational perception is worth monitoring going forward as they seek to acquire new talent,” Tracy wrote.

Another Headwind

Rationalization at domestic athletic retail has been a potential near-term headwind for Under Armour, since store closures would result in inventory liquidations, which would likely drive stepped-up promo across the industry, the analyst noted.

TSA has recently announced plans to pursue liquidation instead of a restructuring. Tracy cited this as incremental -negative, “likely increasing magnitude of close-outs above UA/vendors' prior expectations.”

While Under Armour is likely to be able to sustain revenue growth at 30 percent, the impact could be restricted by GM pressures and ongoing reinvestments into long-term growth.