Even prior to the unprecedented environment that we’re in, Under Armour (NYSE:UA, NYSE:UAA) represented a tough case against industry leaders Nike (NYSE:NKE) and Adidas (OTCMKTS:ADDYY). However, the combination of Under Armour’s baggage, along with the sharply deflated consumer market makes for an almost untenable argument for UA stock.
Primarily, I’m referring to the toxic corporate culture that has plagued the organization for well over a year. In one of the most glaring examples of inappropriate behavior, Under Armour executives and employees attended “gentlemen’s clubs” to impress athletes and co-workers. Frankly, I’m shocked at the blatant audacity – this runs against every ethical principle and quite a few corporate governance laws on the books.
Since the awful doings at the company were made public, there have been major changes at Under Armour. Key among them, Kevin Plank, founder and former chief executive, stepped down earlier in January. In his place is Patrik Frisk, who is both CEO and brand chief. Interestingly, Frisk reports to Plank.
Perhaps for the sake of UA stock, the executives should have decided on a clean and complete split. Based on my inside sources, nothing has changed in terms of the toxicity.
Initially, though, contrarians might suggest that this isn’t a deal killer for UA stock. In recent years, the #MeToo movement has dropped the hammer on several Hollywood personalities. Yet user research indicates that few people have changed their viewing habits because of misconduct allegations.
Theoretically, then, Under Armour may be able to escape consumer wrath. If so, that would be about the only good news that the company has right now. Otherwise, UA stock faces a long road ahead of it.
UA Stock Is Shedding Credibility
While the Under Armour faithful will always support this brand despite its many controversies, the reality is that the sports apparel industry doesn’t operate in a vacuum. Again, even without the pandemic headwind, management already had a tough battle on its hands against Nike and Adidas.
It’s not just that these two are the titans in the highly competitive arena. Rather, the monetary cost to stay relevant in sports apparel continues to escalate. According to a McKinsey & Company research report, “Sponsorships have become an integral component of marketing strategy.”
This is the reason why the alpha dogs don’t blink an eye spending billions endorsing global superstar athletes. Though the expenditures are steep, so are the rewards, especially when you’re dealing with flagship events like the World Cup. But what price is too much?
Based on research from PwC, by the year 2023, the U.S. sports sponsorship market size will have reached $20.65 billion. At the time the study was conducted, analysts forecasted that the year-over-year growth rate from 2019 to 2023 would average 3.8%.
In other words, sponsorship costs are only getting pricier, making it incredibly difficult for companies with lesser means to compete. Plus, Under Armour’s annual revenue growth has slipped to an average of 2.9% in the last three years. So, while industry expenditures are rising, demand for Under Armour products are plateauing. Obviously, this is a huge negative for UA stock.
To be fair, the McKinsey report indicates that effective marketing campaigns can help maximize sponsorship dollars and brand reach. Therefore, the company’s executives have a proven opportunity to shift the narrative.
But how credible is this idea for UA? When you have a toxic work culture, nobody wants to do anything for each other.
Running in Place
I’m afraid that until the dark cloud over the company passes, UA stock will likely see further volatility. As you know, it’s not impossible for corporations to come back from debilitating scandals. But to do so requires trust: trust between the executives and employees, along with trust among lateral rank-and-file relationships.
But again, my inside sources tell me that the toxicity has never left despite some shuffling at the top. That tells me that Under Armour will spend much time grinding their gears away.
Unfortunately, this environment offers no margin for error. At the very least, we’ll suffer a quick shock to the consumer market. In that case, Nike and Adidas are poised to make net gains while Under Armour fights itself.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.