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The case for — and against — Under Armour selling itself

Daniel Roberts and Brian Sozzi

Under Armour stock has bounced back this year from an extended plunge that brought it all the way down to $11 in October 2017. Shares are up 55% in 2018.

But Under Armour’s (UAA) business is struggling mightily amid changing tastes that have been kinder to Adidas and Nike; the decline in popularity of “performance” sports gear and basketball sneakers specifically; and the closure of brick-and-mortar sporting goods retailers like Sports Authority.

Under Armour lost money in 2017 and will lose money again in 2018.

On that note, some bearish onlookers think it’s time for founder and CEO Kevin Plank to give in and sell the company. And at an event this week at the Economic Club of Washington, D.C., Plank was asked if he’d ever sell.

“If anyone ever offered me an amount of money greater than what I believed I could get the company to, it wouldn’t be my choice, but it would be my obligation” to sell, Plank said. “But I have yet to see that happen, so we go back to work every day.”

That answer is practically verbatim to what Plank told Fortune back in 2011: “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.”

But many market pundits think it is time he finally change his tune on a sale, and start courting offers. Here’s the case for Plank to sell his company now—and the case against.

Under Armour CEO Kevin Plank, right, stands with Maryland basketball head coach Mark Turgeon during an NCAA college football game between Maryland and Northwestern in College Park, Md., on Oct. 14, 2017. (AP/Patrick Semansky)
Under Armour CEO Kevin Plank, right, stands with Maryland basketball head coach Mark Turgeon during an NCAA college football game between Maryland and Northwestern in College Park, Md., on Oct. 14, 2017. (AP/Patrick Semansky)

Brian Sozzi: Now is the time for Under Armour to sell

It may be difficult for hard-charging Under Armour founder and CEO Kevin Plank to accept, but it’s probably time to hand off his baby to a larger consumer products company.

With competition from Nike, Lululemon and upstart sportswear companies on the rise, the reality is that Under Armour can no longer be the high-growth business that took Wall Street by storm in the late 1990s. As a result, it would be better for Plank to lock in a fair price today for fellow shareholders ahead of what could be a much smaller share price in five years time.

The numbers alone underscore how intense competitive forces and operating missteps have taken their toll on the once red-hot apparel company:

  • Revenue is seen growing 4.2% this year and 5% next year, according to Bloomberg data. Sales gained 3.1% in 2017. Prior to 2017, Under Armour had seen seven years of 20%-plus sales growth.

  • Gross profit margins are expected to be 45.3% this year. The key retail metric hit an 11-year peak of 50.3% in 2007.

  • Return on invested capital has fallen for five straight years.

“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,” Deutsche Bank retail analyst Paul Trussell writes. He adds that Under Armour faces hurdles to returning to higher revenue growth rates in 2019.

Plank owns 15% of the company and controls the majority of the voting power. It’s now time for him to open up the phone line and hand off Under Armour to a larger company that can take the brand to the next level.

Dan Roberts: Under Armour shouldn’t sell yet

Yes, Under Armour sales growth has stalled, North America trends have been ugly, and the brand has lost some favor amid the extended streak of rival Adidas. Yes, Under Armour will report a loss this year. Yes, the bull case for Under Armour in 2018 looks weak.

But you don’t sell a company when things are bad.

Plank cashing out now would be like the folks who bought bitcoin amid the price surge at the end of 2017, then dumped it in a panic when it dropped this year.

  • Under Armour had an incredible streak of 26 straight quarters with 20% revenue growth or higher. The streak ended in 2017, but that wasn’t so long ago.

  • Under Armour’s international sales grew by nearly 50% in 2017—impressive. It’s the U.S. that’s the problem for UA.

  • Many of the factors that have hurt Under Armour are beyond its control, like the bankruptcies of crucial sporting goods chains including Sports Authority, Sport Chalet, City Sports, EMS, and Golfsmith.

To be sure, the athleisure trend has been brutal for Under Armour—and it’s not going away.

That’s been great for Adidas, which makes “casual sportswear” for people to wear all day (take its Boost line of running shoes that many people wear as everyday shoes) and which, years back in the Run-DMC era, was known for street fashion. (Adidas retro sneakers like the Stan Smiths and Superstars have made a resurgence.)

Under Armour is in a tougher spot: its brand image is tight, sweat-wicking clothing for playing sports or working out. (Hence why brand ambassador Dwayne “The Rock” Johnson is a perfect fit.) In the industry, what Under Armour makes is called “performance” gear, and performance is not hot right now.

But trends can change. Under Armour President and COO Patrik Frisk told Yahoo Finance in February that while current fashion trends have hurt Under Armour, the company doesn’t want to suddenly change its image and strategy to suit the trend.

“What might be perceived as a little bit of a weakness for us today, being in the ‘performance’ bucket so to speak, we believe long-term will be our greatest strength down the line,” Frisk said.

Remember also, when you consider whether Under Armour should sell, that this question isn’t purely about financials for Plank. He represents the classic American entrepreneurial story: He created the company in 1996, when he was a football player at the University of Maryland, because he was unsatisfied with the white cotton shirts that would get soaked and heavy with sweat under his football pads; he did the research, made the trips to factories and other countries, chose the right materials; his first product, a simple shirt, filled a gap in the market; and he grew the business by pitching it directly to coaches and athletic directors of college football programs.

Plank’s journey was no so unlike that of Nike founder Phil Knight. Nike, too, was once the underdog with dreams of taking on German giant Adidas; Under Armour was born as an underdog looking to unseat Nike, and it still bears that underdog mentality, even as it has grown to a company with $5 billion in sales. Under Armour is Plank’s passion. And Plank surely sees selling as waving a white flag.

In May, Plank told NBC Sports his 10-year-plan is still for Under Armour to become the No. 1 sports brand in the world.

He wouldn’t accomplish that by selling.

Daniel Roberts is a senior writer at Yahoo Finance and focuses on sports business. Brian Sozzi is an editor-at-large at Yahoo Finance and focuses on retail. Follow @readDanwrite and @BrianSozzi.

Read more from Yahoo Finance on Under Armour:

Businesses thinking about acquiring Under Armour face a key hurdle

Nike, Under Armour have both faced #MeToo scandals in 2018

The Under Armour lesson: Top athlete endorsers can’t save a brand

Under Armour lost money in 2017

Under Armour: ‘We’re pivoting’

Under Armour has delivered 25 straight quarters of 20% revenue growth