Sean O’Reilly: Dylan and I chatted about Under Armour on the tech show last Friday,
but it was mostly in a positive light because of their showing at CES and their rollouts
of, you know, Fibit competitors and all that stuff. But unfortunately you and I have to
chat about Under Armour in more of a negative light, because of recent events. So, what
happened yesterday? Vincent Shen: Yeah, absolutely. I think it's
really funny because, like you mentioned, last week you and Dylan were talking about
how the company (I'm sure) spent countless hours and a ton of effort preparing this big
launch for themselves at CES of this suite of products they're offering.
O'Reilly: And it was a hit. Shen: Four hundred dollars, you get the scale,
the chest band, other wearables ... O'Reilly: A heart monitor that's actually
by your heart and not on your wrist (laughs) ...
Shen: Yeah, exactly. A whole fitness suite, essentially. That generated quite a bit of
buzz at the event. But then they start this new week on Monday with Morgan Stanley, their
equity research analyst, putting out this very bearish report on the company, cutting
it to a sell, essentially, reducing the price target some 40%.
O'Reilly: What is it, so that's like $40 or something? Or $50?
Shen: Yeah, it was reducing it significantly to about $62 - I think below even where it's
trading now. O'Reilly: I might be getting ahead of ourselves
here. Did they talk about valuation at all? Because that stock has a high P/E, like it
always does, so ... Shen: There's no denying that. Right now in
terms of forward earnings I think it's trading about fifty one times. Definitely high valuation.
You have to keep in mind, the stock gained 19% in 2015.
O'Reilly: Not bad, yeah. Shen: And that's on top of gains that it has
put up ... It has logged strong gains -- double digits I'm pretty sure for most years -- since
2009. Seven straight years of gains at this point.
O'Reilly: So what do those reports say? Because Morgan Stanley comes out, are they just being
negative just to be negative? What's the deal? Shen: Sure thing. I think there's two main
points in the report that I want to cover and get to. I think in this case, sometimes
these reports come out, they ding the stock, and it's not really something that fundamental
to the business. It's more of a near term volatility. This is an instance where I actually
do think it touches on very important issues for this company. If you think about Under
Armour and what they've mentioned as being some of their pillars of growth: women's apparel,
men's apparel, their international business, e-commerce, things along those lines ...
O'Reilly: Shoes ... Shen: Women's apparel's been a big part for
them. It's been growing very very quickly, far outpacing their men's division. And the
company has invested a lot to develop that part of their business. 2014-2015 I think
they spent something like $15 million on the marketing campaign with some really famous
athletes. The one that I remember seeing and thinking was really cool was with Misty Copeland,
and she has her narrating over the video about how people were doubting her and showing her
... And also Giselle Bundchen had her commercial with Under Armour as well.
So a lot of buzz around that, and it was part of their efforts to build up their women's
business. And now you have this report coming out saying, growth has gone from double digits
essentially to stalling for the last six months of 2015. Stalling to essentially flat for
the women's business, which makes up about a third of their total business at the moment.
And also the fact that ... The second issue to really ding them is how for their footwear
they've seen average selling prices fall since the beginning of 2013, so about the past three
years. Average selling prices for their running shoes have fallen 20%, versus 4% for the broader
industry. The two ways that this rolls in, like I said, women's apparel being really
important, but also in terms of the company's overall brand image ... It's always been high
performance at a premium. High quality at a premium.
But with those average selling prices there's concerns now among investors that all of a
sudden if there's this shift where the company must compete more on price, you're going to
see ... Obviously margins are going to start compressing, the average selling price is
going to continue to fall. What impact that's going to have on their growth rate, which
a lot of analysts are expecting to grow 20 to 25% annually over the next five years.
Is that sustainable? And so it really changes all of a sudden the
trajectory that this company might take. It's an interesting look into this report, how
it touches on two really important things for them.