Summary
- After profiting from shorting the bubble in 2015-2016, I have kept Under Armour on my watchlist.
- The questionable expansion strategy led to many fundamental problems, including poor cash flows, excessive inventories and deteriorating margins.
- I analyze the company's developments on several fronts to understand whether the hope of a turnaround is more credible than before.
Source: underarmour.com
Under Armour (UA) (UAA) has been a typical example of a company that ends up being a victim of its own success. After the fad of 2014-2016, Under Armour’s fundamentals experienced a disastrous deterioration. The stock posted a crash for two years and then moved sideways despite the stock market’s bull run. As it’s typical of these fad-driven stories, Under Armour had to face margin and cash-flow deterioration, together with exploding inventories. In these situations, the ability to stabilize inventories and prices/margins become two key ingredients to hope for an improvement and effectively time a potential entry. In this article, I analyze Under Armour’s inventory, cash flows and margin trends to understand whether they suggest a real and consistent improvement in fundamentals.
A Bit Of Context
When consumer fads burst, we can see which companies have been effective in managing their own success and which ones have failed to control the impact of the obvious deterioration in sales growth and pricing power that had to be expected. For Under Armour, it’s clear that the management did a poor job in controlling its own success. While sales growth went from above 30% in 2014 to low-single digits a few years later, gross margin crashed over 500bps and operating margin contracted from above 11% to the 2%-3% range in 2018-2019.
Source: Sentieo
In recent quarters, both these key profitability metrics started to improve, potentially highlighting a stabilization of fundamentals. The analysis of inventory dynamics will help us assess whether this improvement is consistent and potentially long-lasting or just a flash in the pan.
