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Why Under Armour's performance is really disturbing

Brian Sozzi
Editor-at-Large

Under Armour’s (UAA) week has left a very bad taste in my mouth and the retailer’s entire shareholder base.

The problem is, it doesn’t appear that bad taste is going away anytime soon. And it’s disturbing when one considers how hard the once red-hot retail brand has fallen from grace. Here is a U.S. success story founded by now executive chairman and brand chief Kevin Plank that burst onto the consumer scene with tight sweat-wicking clothes more than a decade ago. None of this form-fitting, workout helpful stuff existed for gym goers before Under Armour and Plank arrived. Nike won’t agree with that, but it’s damn true. Adidas wasn’t even in the discussion— too focused on soccer cleats.

Under Armour created an entire product category essentially from one guy, Plank, a former college football player turn tight-shirt salesman.

Under Armour clothes are displayed at a Kohl's store in Colma, Calif., Friday, Nov. 29, 2019. (AP Photo/Jeff Chiu)

Somewhere along the way Plank and the countless Under Armour executives that have cycled through the company badly dropped the ball. They got wrapped up in their own hubris (see the excess theatrics of product launch parties, over-the-top earnings calls and ultra-rich athlete endorsement contracts) and growth goals that couldn’t be achieved. They forgot that innovation was at the heart of Under Armour. Yet, they persisted to expand Under Armour downmarket into Kohl’s to meet quarterly earnings numbers. Products were pumped into off-price retailers such as TJ Maxx to the detriment of profit margins. The right operating procedures — in terms of product creation and HR (per several WSJ investigations in 2019) — were never put into place.

In short, the Under Armour of 2015 and most of 2019 resembled a giant party house that so happened to be a public company. The stock has crashed 55% over the past five years.

And Under Armour’s latest earnings call proves all of this out... and underscores that a great American comeback story is far from guaranteed under new CEO and veteran retail exec Patrik Frisk.

Under Armour’s awful week

I forgot how bad things have gotten at Under Armour. Sure I still closely follow the company and have numerous sources on the name. But my career path has changed (I’m not a stock analyst anymore), and so has my coverage of Under Armour.

Once the company’s fourth quarter earnings report hit the wires earlier this week, I can’t say it came as a surprise. Sales tallied $1.44 billion, missing estimates for $1.47 billion. Adjusted earnings were in line with forecasts. Headlines crossed on Under Armour predicting up to a $60 million first quarter hit to sales due to the coronavirus outbreak in China. Apparently the company may not be opening it New York City flagship store on pricey Fifth Avenue and may incur charges of $225 million to $250 million.

The stock plunged 19% on Feb. 11. Ugly, and deserved.

“UAA is hurting from its performance design focus in a fashion athletic world, and UAA is still suffering from poor past strategic decisions that are weighing on expenses. Management is trying to right the ship, but it will take time,” said Jefferies analyst Randal Konik in a note to clients.

But the depth of Under Armour’s issues — months after a key investor day in December 2018 — run very deep. That is something I forgot about, but was reminded of after listening to Frisk on the earnings call.

A couple key statements from Frisk:

“As a brand, however, we see a paradox of two challenges in front of us. Continued softer demand in North America as we work through our elevated inventory and multiple years of discounting, and a highly committed cost structure which is taking longer to unpack and is limiting us from being able to spend as aggressively as we would like to, to increase brand consideration.”

“In full-price wholesale, we're working to improve every aspect of our partnership from service levels and on time delivery to segmentation and marketing support. Operationally, I'm confident that we've become a better partner for our wholesale accounts. And while we are checking the right boxes and seeing confidence return into the mix, the rate of recovering our shelf space in this channel is not happening as quickly as we had expected. And of course, it takes more than being a great operator to win with our accounts. It takes a strong brand, and we've been a very quiet brand for the past few years. In 2020, that changes dramatically.”

“I think when it comes to what would I have done differently; you'd always like to go quicker. You always would like to go quicker. But the reality is also, you have to take into consideration the cultural aspect of change management when you go through these things. And it's sometimes hard to call the ball on exact timing of a transformation because there's so much work that needs to happen across the entire organization and what we see playing out here now for Under Armour is a little bit of a delayed effect in North America unfortunately.”

Can’t regain shelf space at retailers? Not opening flagship stores? More tough decisions on the way? This isn’t the Under Armour I grew up covering. This isn’t the Under Armour comeback story Wall Street was pitched back in December 2018. No, this has all the makings of a brand continuing to be in a crisis and a stock that may have further downside risk. It’s wildly unclear if Under Armour emerges out the other side, and in what form.

The solution may just be for Under Armour — and large shareholder Plank — to unload the company to professional operators in VF Corp. or Nike. While Frisk deserves credit for adding operational rigor to the company, the business appears to be in such a damaged state that only a larger organization could fundamentally alter its course.

I am rooting for Under Armour to get its act together. Shareholders are probably right there along with me.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Watch The First Trade each day here at 9:00 a.m. ET or on Verizon FIOS channel 604. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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