To get back on track, Under Armour Inc. needs to first slow down and figure out where it's going.
More than a fifth of Under Armour's market capitalization, or about $2.7 billion, vanished Tuesday after the company said its quarterly revenue growth fell below 20 percent for the first time in 26 quarters and that it was replacing its CFO after only 13 months.
Short sellers -- who have made Under Armour the most-shorted stock in the S&P 500 -- were rewarded as shares fell 25 percent.
Consider it a stark warning for CEO Kevin Plank to slow down and get things right -- or risk losing even more.
Back in October, I wrote that Plank's plan to take on Nike Inc. had legs, but warned his explanation for dwindling profits -- that he was pursuing the Amazon model of temporarily forgoing profits while grabbing market share -- was on shaky ground. Getting away with such an unorthodox strategy requires Amazon-sized revenue growth. I warned investors Under Armour would suffer unless it kept quarterly growth figures above 20 percent and reached its 2018 revenue target of $7.5 billion. So much for that.
Under Armor still has major opportunities, including its expansion into new product lines and international markets. But to reach Plank's goal of becoming a $10 billion retailer by 2020, it's clear Under Armour must pause and get its U.S. house in order before any of that will matter to investors. After all, its legacy U.S. division still represents 80 percent of its business.
The company can start by being more careful about where it sells its goods. Does it really want to hitch its wagon to mid-price retailer Kohl's Corp., with a sales partnership starting this year that will make Under Armour clothes look more downmarket? And does it really want to see steep discounts on its clothes at Amazon and T.J. Maxx? All that does is confuse consumers and dilute the halo effect that might have come with the launch of a high-end clothing line -- including $1,500 trench coats and $199 wool trousers -- at New York Fashion Week last year.
The slowdown in traffic and sales at the department stores and retailers where it sells its goods will only get worse, not better. Under Armour should follow the likes of Coach Inc. and Ralph Lauren Corp. by aggressively unloading stuff that's not selling, taking a monster one-time hit, and then changing course on how much it sells to troubled department and specialty stores and being more strict on the discounts it lets these stores offer on its goods.
Selling more footwear and fashion products will also get increasingly important for Under Armour amid growing activewear competition from Adidas AG, whose runaway growth has taken a bite out of Under Armour and Nike's sales.
As Under Armour transitions from a fast-growing startup to a more mature retailer at perhaps the toughest time in decades to be a mature retailer, things will get worse before they get better. Shares in Under Armour trade at 31 times forward earnings, down from a two-year historical average multiple of 62. But the stock still trades above competitors such as Lululemon Athletica Inc. and Nike Inc., at multiples of 26 and 21, respectively.
The company also must show investors it can get more bang for its buck, as return on invested capital has sunk to around 10 percent in 2016 from 16 percent in 2012.
Absent some of these major changes, Under Armour will have a hard time catching its breath.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
To contact the author of this story:
Shelly Banjo in New York at firstname.lastname@example.org
To contact the editor responsible for this story:
Mark Gongloff at email@example.com