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Businesses thinking about acquiring Under Armour face a key hurdle

Brian Sozzi
Editor-at-Large

Those bigger sportswear brands eyeing Under Armour’s (UAA) new PR crisis and 25% drop in the stock price the past two years and pondering an offer for the company may be still stuck on one thing.

That is how expensive Under Armour continues to be valued several years removed from its moisture-wicking shirt heyday. Deutsche Bank analyst Paul Trussell points out that Under Armour’s forward price-to earnings multiple of about 68 times is “multiples above” other retailers that he covers. For instance, sportswear category behemoth Nike’s forward price-to-earnings multiple is about 24 times.

Trussell says that valuation is now a key factor in considering to buy Under Armour’s stock given its “tepid” revenue growth.

“Revenue growth of 2.4% [in the most recent quarter] is still constrained compared to others in the space such as Nike, Lululemon, Vans [owned by V.F. Corp.], and Champion who have posted high single digit to double digit revenue growth over the past few quarters,” Trussell writes. He adds that Under Armour faces hurdles to returning to higher revenue growth rates in 2019.

On another widely used measure known as trailing-twelve month enterprise value to earnings before interest, taxes and depreciation, or EV/EBITDA, Under Armour is valued at 26 times. Nike is at 21 times. Resurgent yoga apparel brand Lululemon clocks in at 21 times as well.

Deal Time?

Despite Under Armour’s mild resurgence in 2018 amid improvements in sneaker design and inventory management, the blistering growth rates that rocketed the company to fame are now in the past due to greater competition.

One long-time retail analyst on the Street tells Yahoo Finance they are unsure why Under Armour is still valued at such a premium to other retail brands given the company’s performance of late. “Who would buy the company,” the source remarked.

V.F. Corp., known to be a consolidator in the apparel space, has long been rumored to have interest in Under Armour. The owner of brands like Timberland and The North Face is also known for not overpaying for brands.

Under Armour founder and CEO Kevin Plank faces a key test.

Hence, it’s not a surprise V.F. Corp. has stayed on the sidelines with respect to Under Armour.

The other question is what would compel Under Armour founder and CEO Kevin Plank to finally sell. The passionate Under Armour leader owns 15% of the company and controls the majority of the voting power.

He has repeatedly shot down selling the baby he founded in 1996 to compete with the big bad Nike. While some on Wall Street have criticized his leadership, there is no mistaking that he bleeds UA.

“Well, let me be the first to tell you guys today, we are not selling this company!” Plank said at a company town hall in 2011 attended by Yahoo Finance’s Dan Roberts (then at Fortune Magazine). Plank did leave the door open to a sale, however.

“If I ever was offered an amount of money that was larger than what I believed I could get the company to, I would be obligated to sell,” Plank told Roberts at the time.

Under Armour investors will likely demand to learn Plank’s updated thoughts on shareholder value creation at the company’s Dec. 12 investor day. The other hot topic will be steps Under Armour is taking to move beyond its fresh PR nightmare.

The Wall Street Journal reported Monday evening that Under Armour executives and employees used to take colleagues and athletes to strip joints. Under Armour reportedly paid the bill for these outings.

Kelley McCormick, senior vice president of corporate communications at Under Armour, said in a statement “the company doesn’t condone use of adult entertainment for business.  Mr. Plank didn’t conduct business at strip clubs or use company funds at such venues.” Under Armour has vowed to continue improving its corporate culture.

Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter@BrianSozzi

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