Part 1: Should Under Armour Consider Selling Its Business?
After recording over a decade of consistent growth, in recent times, Under Armour (NYSE:UA) has seen its revenues fall on a dismal North American apparel market. To counter this, last year CEO Kevin Plank, introduced a “pivot” strategy that was aimed to turn things around at the company. So far, this strategy seems to be working well.
That said, it has burnt a massive hole in the athletic manufacturer’s profits, which aren’t expected to recover in the near term. This begs the question, should Under Armour consider selling its business to a larger company like Nike or Amazon? Would it help stabilize operations sooner?
Before we get down to answering this question, it would prove worthwhile to recap what exactly pushed Under Armour into such a situation.
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What Went Wrong?
As mentioned above, the North American market has been hit hard over the last few quarters on sluggish demand that has weighed consistently on the top line, leading to a severe build-up in inventory. To clear out this build-up in stock, through most of 2016 and 2017, management resorted to selling products at heavily discounted prices and offering higher promotions than usual. Both these strategies hurt the company’s financials significantly in the past few quarters.
To make the best of a bad situation, CEO Kevin Plank emphasized the company’s aim to vie for long-term opportunity, opposing short-term gains at the expense of continued growth. However, it wasn’t until recently that these plans came into effect.
Initially, the company resorted to appease investors worried about the falling top line, than work towards the bigger picture. Instead of carrying forward with its plans to create innovative products, focus on targeted marketing, and expanding internationally, the company went away from this long-term strategy to focus on short-term gains.
With strategic investments in three key areas — its international business, women’s apparel, and digital — Under Armour has been able to initiate a long-term strategy that is bound to help return it to notable profitability.
That said, in the near term, as mentioned above, these investments and increased costs have gravely affected the bottom line, and is expected to continue to do so over the next couple of years.
At the moment, the company’s stock is trading at $18.70, almost in line with our current price estimate of $18.45. In this respect, we have created an interactive dashboard Is The Market Pricing Under Armour Fairly to best explain our methods and reasoning. Click on the link to come up with your own price estimate.
Through the remainder of this series, we will be concentrating on trying to answer pertinent questions regarding Under Armour’s financial health and whether selling its business is the right move.
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