Under Armour Inc (UAA) Should Copy Nike and Partner With Amazon.com

Richard Saintvilus

Updated Tue, Jul 18, 2017, 3:00 AM

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Imitation might be the sincerest form of flattery, but in the case of Under Armour Inc (NYSE:UAA, NYSE:UA), imitation could also might also be the thing that could pull UA stock from its recent declines.

Under Armour Inc (UAA) Should Copy Nike and Partner With Amazon.com

Source: SandyDover via Flickr (Modified)

Aside from intense competition from larger rivals Nike Inc (NYSE:NKE) and adidas AG (OTCMKTS:ADDYY), Under Armour has shot itself in the foot with questionable design decisions, which has hurt its sales.

UAA stock, which closed Monday at $20.45, has plunged from around $47 in less than a year. But it’s not too late for the Maryland-based athletic apparel and footwear giant to turn things around.

With shares down about 30% year to date versus a 14% rise for NKE, Under Armour should follow Nike’s footsteps and linkup with Amazon.com, Inc. (NASDAQ:AMZN) to add another means of distribution.

In search of growth, Nike recently turned to the e-commerce giant as a way to reduce the pressure it faces from third-party sellers, which have peddled the shoe maker’s products on Amazon, undercutting premium pricing power. Nike no longer wants to tie its fate solely to struggling retailers such as Foot Locker, Inc. (NYSE:FL), Hibbett Sports, Inc. (NASDAQ:HIBB) and Dicks Sporting Goods Inc (NYSE:DKS). Sports Authority’s recent bankruptcy filing should be a wake-up call to the industry.

Margins Limit UAA Stock Upside

A tie-up with Amazon would also help stabilize Under Armour’s profit margins — the percentage of its revenue retained excluding manufacturing costs (for materials and labor) — which have been under intense pressure. Its margins have been scrutinized, thus limiting the upside potential of UAA stock. And it’s been for good reason. In the first quarter, for example, Under Armour’s revenue was up a strong 7%, besting Nike’s 5% rise in its comparable quarter. However, UA’s gross margin was down 70 basis points.

10 Dividend Stocks Growing Their Payouts by 20% or More

To be fair, Under Armour management, which had decided to use aggressive promotions to shift from selling higher-margin apparel in favor of lower-margin footwear, didn’t try to sugarcoat the margin numbers. Though the company, which slashed prices to win back customers, claimed that the gross margin was in line with their forecast, they conceded that inventory management and distribution were unacceptable in the quarter and not where it should be.

This, too, was the unfortunate result of the Sports Authority bankruptcy, which flooded the market with excess wholesale inventory. Meanwhile, there’s also the cost associated with pricey endorsement deals with celebrities like The Rock and Steph Curry which, while aimed at keeping pace with Nike and Adidas, only adds to the margin erosion.

Can Under Armour Protect Its House?

Looking ahead to the June quarter, Under Armour is expected to deliver a loss of 6 cents per share, while revenue of $1.08 billion would climb 7.7% year over year. UAA’s rising expenses, including investments in direct-to-consumer (DTC) and R&D is expected to pressure margins for fiscal year and next. And the market doesn’t expect the company’s eroding profit situation to immediately improve.

In a recent note to investors, Neil Saunders, analyst at GlobalData Retail said that his “outlook on [Under Armour’s] profits remains relatively gloomy” as “a push to more direct sales, including via e-commerce, will dilute margins.” And this is where, in my opinion, Amazon could help reduce the burden on profits by lowering operating expenses associated with DTC investments, while at the same time, adding another strong means of distribution.

With escalating pressure to increase revenue and UAA stock price, Under Armour could immediately get access to Amazon’s many millions of users, including the estimated 80 million in the U.S. who are high-spending Prime members. What’s more, Under Armour should seek to capitalize on Amazon’s new program called Prime Wardrobe, which allows shoppers to order clothes for free and pay for only the products they decide to keep.

Bottom Line for UAA Stock

At a moment when sporting goods retailers and department stores are struggling to compete with Amazon, Under Armour should run to where shoppers are going. UA would not only get another massive distribution channel, it can sell directly to consumers, thus testing the effectiveness of its DTC initiative without the added cost.

Amazon.com, Inc. (AMZN) Hammers Blue Apron Holdings Inc (APRN) With Meal Kit Trademark

For now, it’s a slight positive that the company last quarter maintained its fiscal 2017 guidance of $320 million in operating profit and a marginal year-over-year decline in gross margin compared to the 46.4% it achieved in 2016. But for UAA stock to really take off, its products not only have to remain relevant to consumers, its profits must run higher to appeal to investors. Still, I expect the sharesS to rebound to $25 in the next 12 to 18 months.

As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.