Analyst: Under Armour Risks 'Prolonged And Pervasive' Promotions, Loss Of Brand Cachet

Under Armour Inc UAA investors should be concerned with the retailer's turnaround plans, according to Canaccord Genuity. 

The Analyst

Canaccord Genuity analyst Camilo Lyon reiterated a Sell rating on Under Armour with a $9 price target.

The Thesis

Under Armour's near-term actions are unlikely to result in stability and profitable growth, Lyon said in a Friday note. (See the analyst's track record here.) 

“Rather, we see the risk of a prolonged and pervasive promotional cycle and subsequently a brand that could lose its cachet, none of which is embedded in [the] current valuation," the analyst said.

5 Reasons Why Under Armour Is A Sell

Off-Price Clearance Is A Problem

Under Armour entered 2018 with $121 million in excess North American inventory, Lyon said. Canaccord estimates the excess product will translate into 5 million units for sale at discounted prices and will disrupt the company's pricing architecture in fall 2018.

Analyst: Innovation Needed

Until Under Armour properly segments its channels and innovates with the needed amount of volume, the company will see long-term growth rates return to the low single digits, Lyon said.

Reduction In SKU Count Could Result in Big Loss In Revenue

Under Armour has discussed plans to reduce its SKU count by 30-40 percent by 2019. In a base case scenario, this will result in an estimated loss of 10-20 percent of revenue, according to Canaccord.

Footwear Segment Slowing 

Under Armour quietly rolled out the Curry 5 this week, but there is still reason to be concerned about one of the retailer's key categories. 

In December, Canaccord asked over 6,000 consumers what their favorite footwear company was, Lyon said. Forty-eight percent named Nike Inc NKE, while only 16 percent went with Under Armour.

The sell-side firm conducted the poll again in March with more than 11,000 consumers. In those results, Under Armour dropped to 7 percent while Nike rose to 49 percent. The decline in Under Armour fans was equally pronounced among men and women, Lyon said. 

Nike Is Coming Alive And Adidas Can’t Be Ignored

Nike is accelerating its innovation, and the strength of adidas AG (ADR) ADDYY "can't be ignored," the analyst said. 

Adidas posted fourth-quarter growth of 31 percent in North America this week.

“NKE’s new ‘triple double’ directive is undoubtedly taking shape. Specifically, we see signs that its product pipeline is gaining traction, which would not be good for UAA," Lyon said. 

"Moreover, Adidas has become a more formidable competitor in recent years as evidenced by its 29-percent growth in North America in Q4." 

Price Action

Under Armour shares were up nearly 2 percent at $16.22 at time of publication Friday. 

Related Links: 

Adidas Continues North American Tear With 31% Sales Growth

Dick's Sporting Goods Relaunches Tommy Armour Brand To Jumpstart Private Label Business

Photo courtesy of Under Armour.