Susquehanna Financial Group on Tuesday raised its rating on Under Armour to “Neutral” from “Negative.”
In a note, Susquehanna analyst Sam Poser that while Under Armour’s business “will be challenging for some time,” the downside to owning the stock is “more limited as UAA may have set the bar low enough to allow the company to hit the reset button.”
The stock has fallen 29 percent following its recent earnings report that marked the second time the company lowered its outlook for the year. It also warned of continued growth challenges in 2018.
Poser wrote, “After CEO Plank’s commentary about continued challenges in North America (NA) into FY18, the Street is already bracing for poor results for the foreseeable future. Further, we believe UAA is becoming somewhat more cognizant of its recent mistakes.”
Still, Poser noted that there’s still “no clear-cut evidence that UAA is willing to pull back distribution.” He believes a big driver behind Under Armour recent weak performance has been its move into moderate channel distribution (Kohl’s, Famous Footwear and DSW) without enough segmentation.
He wrote, “Management’s commentary about ‘assessing the distribution model’ and ‘creating a predictable pull model’ may be signs that new COO Patrik Frisk is beginning to affect cultural change, although management, wrongly in our view, believes that its current NA wholesale distribution will allow UAA to grow as an affordable luxury brand.”
Poser noted that revenue increases from new moderate channel distribution have not been enough to offset declines in the sports specialty channel, such as Dick’s, Hibbett, Academy and Modell’s. Said Poser, “We believe brand erosion in North America has caused UAA products to become indistinct in the marketplace, ubiquitous across channels, and vulnerable to the promotional environment. UAA’s legacy wholesale partners have responded with fewer orders and cancellations of UAA product. “
Other factors impacting Under Armour include “poor innovation, storytelling, and brand messaging” that has hurt the brand’s status, its failure so far to develop a compelling lifestyle offering, and recent shipment delays and poor customer service levels resulting from an SAP implementation.
Power wrote, “Overall, while we can no longer justify a Negative rating, UAA must fully address these issues soon if it is to return to healthy growth in the U.S.”
Susquehanna lowered its price target on Under Armour from $15.00 to $11.00. Shares of Under Armour closed Tuesday at $11.88, down 15 cents.
Photo courtesy Under Armour
