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3 signs that Under Armour is 'shrinking to grow'

Daniel Roberts
·4 min read

The end of Under Armour’s long losing streak might be in sight.

The Baltimore-based sports apparel brand has seen its U.S. sales decline for seven consecutive quarters. In its second-quarter earnings report last week, sales fell 40% to $707 million but beat Wall Street expectations, as did the loss per share of 31 cents.

Those numbers sound ugly. But BMO Capital Markets analyst Simeon Siegel floated a theory early in the pandemic that Under Armour (UA, UAA) could effectively “shrink to grow” by putting out a smaller volume of product and pricing it higher to focus on profits, not sales.

Siegel now thinks there are three key signs Under Armour is doing just that, starting with its better gross margins of 49.3% in Q2.

1. Back in 2016, Under Armour cut a deal to move into the 5th Avenue storefront vacated by FAO Schwarz and make it the company’s New York City flagship retail store. Four years later, in February, the company canceled that plan amid the pandemic.

The 5th Avenue flagship store “was going to be the physical manifestation of ceaseless growth,” Siegel says, a major symbol for the company. “Acknowledging it doesn’t make sense anymore is a multi-hundred-million-dollars backpedaling,” but an honest and public one.

2. There’s another huge deal Under Armour signed in 2016 and walked away from in 2020: its 15-year, $280 million apparel sponsorship of UCLA. At the time it was signed, it was the biggest college sports apparel deal ever. In June, Under Armour terminated the UCLA deal, citing “lack of marketing benefits.” It also sought to terminate its 10-year, $86 million sponsorship of UC Berkeley. UCLA is now suing Under Armour, while Berkeley has called Under Armour’s attempt to get out of the deal “improper.” But Siegel says, “walking back from those incredibly high-profile deals is yet another admission that this is not the growing Under Armour, but one focused on profits.”

Both the flagship store plan and the expensive school apparel deals were already “being viewed as mistakes” in 2016, Siegel says, and “the fact that they can externally acknowledge that these were mistakes, at least that is putting the right foot forward.”

3. If you walk into a physical apparel store like Dick’s Sporting Goods (DKS) these days, you’ll likely notice there’s simply less Under Armour stuff. Siegel has observed a “massive reduction in inventory,” another sign Under Armour is pumping less product to retail chains in an effort to return to being a premium, full-price brand with better profit margins.

Under Armour founder Kevin Plank said it back in 2017: “The role both we and our retailers expect us to play is as a premium, full-price brand.”

A display of Under Armour's Dwayne "The Rock" Johnson apparel at a Dick's Sporting Goods in Norwalk, CT, on Aug. 15, 2020. (Daniel Roberts/Yahoo Finance)
A display of Under Armour's Dwayne "The Rock" Johnson apparel at a Dick's Sporting Goods in Norwalk, CT, on Aug. 15, 2020. (Daniel Roberts/Yahoo Finance)

“Growth at all costs was the Under Armour mantra, and now all of a sudden there’s this idea of: Let’s get healthier,” Siegel says. “Charge a little bit more money and sell a little bit fewer goods, and there’s a really interesting story.”

Victoria’s Secret is the comparison Siegel draws for Under Armour. The lingerie brand has long weighed on parent company L Brands (LB), but L Brands in its Q2 earnings last week indicated that even though Victoria’s Secret sales fell again, e-commerce was strong and the company is now focusing on cutting inventory volume and increasing profit margins.

Victoria’s Secret, like Under Armour, is hardly dead: it generated $6.8 billion in sales in 2019. (Under Armour did $5.3 billion in 2019.) “I think we’re seeing the results already at Victoria’s Secret,” Siegel says. “I think we’re seeing the green shoots at Under Armour.”

Daniel Roberts is an editor-at-large at Yahoo Finance. Follow him on Twitter at @readDanwrite.

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