Here's everything wrong at Under Armour

Daniel Roberts

Under Armour’s third-quarter earnings this week beat Wall Street expectations on both revenue ($1.43 billion) and earnings (23 cents per share), but the stock fell by as much as 16% after a report that the company is the subject of a federal accounting probe into whether it misrepresented its sales numbers. (Baird promptly downgraded the stock to neutral from overperform.)

Yet Under Armour (UAA) has much bigger fundamental problems with its business, beyond the troubling question of whether it cooked its books. (On the earnings call, CFO David Bergman would only reiterate the company’s prior statement on the investigation: “We firmly believe that our accounting practices and disclosures were appropriate.”)

Here are all the major problem areas that need fixing for this previous high-flyer – which reported 27 consecutive quarters of at least 20% revenue growth until 2016 – to bounce back.

North America decline and discounting

Under Armour’s sales in North America fell 4% in Q3. That’s the fifth quarter in a row of North America sales declines; the last time Under Armour’s sales grew in the U.S. was Q2 of 2018.

That’s unacceptable in the home market for a brand whose slogan is “protect this house.”

Some of the North America weakness has been exacerbated by the closure of sporting goods chains like Sports Authority. The brick-and-mortar losses have hurt Nike and Adidas, too. But Under Armour, analysts say, has discounted its gear in big-box chains more than its competitors, and that has hurt the brand as a result. When parents walk into Dick’s Sporting Goods with their kids and see Under Armour shirts marked way down, they stop seeing Under Armour as a premium label.

International growth has been a bright spot for the brand over this time, especially Asia, and specifically China, where Under Armour has seen double-digit growth in many quarters. But many American apparel brands are finding success in China, where the market is so huge (1.3 billion people) that big growth numbers are very attainable.

Under Armour has got to translate that success to its home market, which is bringing down all of its global metrics. In Q3, the company’s global apparel sales were down 1% from a year earlier, accessories were down 2%, and worst of all, sneakers were down an abysmal 12%.

Credit Suisse, in a note this week, called the 12% footwear decline “concerning” considering that footwear was the category that Under Armour said at its 2018 analyst day would “grow at the fastest 5-year revenue CAGR of any category.” Credit Suisse lowered its price target on the stock to $20 from $25 and concluded the company is on “unsteady footing in the near-term.”

Sneaker woes

Sneakers have been a particular frustration for Under Armour. In 2009, the brand finally launched its first sneaker (it previously only had football cleats): a running shoe, following Nike’s roots in track. Kevin Plank told Fortune that year, “You can't be a world-class athletic brand without the ability to outfit the athlete head to toe.” The shoe was not an instant hit, and analysts for years dogged the company for not “figuring out footwear” yet. In 2010 it launched its first basketball sneaker line, the Micro G, including a now-forgotten Brandon Jennings signature shoe, the Micro G Black Ice.

It wasn’t until 2015 that Under Armour launched a signature basketball sneaker around Steph Curry, Under Armour’s best-known shoe line. The Curry 1s launched with great anticipation and hype, but right around then is also when performance basketball sneakers, as a category, began declining. The category has seen 20% declines in recent years, and that has hit Under Armour hard. Americans just aren’t buying performance sneakers anymore; they’re buying fashionable running shoes to wear as everyday shoes. This trend has helped Adidas claw some U.S. sneaker market share from Nike, while Under Armour sneaker share has stalled.

It isn’t just basketball: sales of all manner of performance sneakers (shoes worn to play sports in), across the board, are down. That’s unprecedented. Chalk it up to the athleisure takeover.

“For the first 40 or 50 years of what I would call the modern sneaker marketplace, we have always had at least one performance category that has been in fashion and trendy,” says NPD Group analyst Matt Powell. “We’re now going close to four years with not having a single performance category in the plus column. We are very much in an athleisure cycle and this a fundamental shift for the industry.”

Athleisure lingers

Athleisure—comfortable athletic gear worn as everyday fashion—is a trend many hoped would wither and die. It hasn’t. Kevin Plank knows his company is ill-suited to the trend: it was born in 1997 on a football field, and its first iconic product was a tight, sweat-wicking undershirt for football players. On an earnings call back in 2016, Plank said, “It’s not about what people are conveniently referring to as athleisure.” But in 2019 the sports apparel industry is, indeed, about athleisure. This year, Plank also said, “We’re going to double-down on performance.” That hasn’t gone well.

As Yahoo Finance anchor Julie Hyman remarked recently, “When I think of Under Armour, my image, right or wrong, fair or not, is: dark, not a lot of bright colors, functional, and not very fashionable.”

Under Armour CEO Kevin Plank, right, stands on the Maryland sideline alongside Maryland basketball head coach Mark Turgeon during an NCAA college football game between Maryland and Northwestern in College Park, Md., Saturday, Oct. 14, 2017. (AP Photo/Patrick Semansky)

In August 2017, when Under Armour announced it would cut 2% of its global workforce, Plank told analysts very bluntly, “We’re pivoting,” and listed the ways: “From a product company to a consumer-led and category-managed brand; “From predominantly men’s to distinct collections for men, women and kids”; “From US/mostly apparel centric to a global/apparel, footwear and accessories portfolio”; “From mainly wholesale to a more balanced, direct-to-consumer offering”; “From a historically top-line driven P&L to a return-focused, more disciplined financial model”; and, “From Good to Great operations.”

Two years later, Under Armour is still falling, not gaining, in America.

Brand image

And then there are the intangibles. Many pin the sales declines on a more difficult-to-quantify loss of brand reputation for Under Armour over the last few years. The brand has simply “fallen out of favor with teen boys, who are the arbiters of what’s cool in the athletic world,” says Deb Gabor, a branding author and head of Sol Marketing.

The sneaker collecting craze of the past few years hasn’t helped Under Armour much either: Adidas came roaring back in America thanks to bring back its retro sneakers, and Nike still, after all these years, sees gains from its Jordan Brand. Under Armour has no retro stuff—its closest thing to collector candy is a line of gym sneakers with Dwayne “The Rock” Johnson that it puts out in very limited supply.

Under Armour needs to get cool again with American kids. Once that happens, sales growth will follow. That’s why, as Kevin Plank revealed on the Q3 earnings call, the company plans to ramp up its marketing spend in 2020. “You’ll hear about this brand,” Plank said. “You’ll hear us tell our story.”

The Under Armour cleats of the Maryland Terrapins prior to the game against the Temple Owls at Lincoln Financial Field on September 14, 2019 in Philadelphia, Pennsylvania. (Photo by Mitchell Leff/Getty Images)

Corporate culture

Finally, there are the cultural issues at the company.

Last November, the Wall Street Journal reported a new change inside the company: Under Armour employees could no longer charge strip club visits to their corporate cards. The fact that they were allowed to until 2018 became the focus of much derision. The WSJ also reported that women at Under Armour were invited to one company event “based on their attractiveness to appeal to male guests.”

In a statement in response to that story, Plank said, “Our teammates deserve to work in a respectful and empowering environment… We will embrace this moment to accelerate the ongoing meaningful cultural transformation that is already under way at Under Armour. We can and will do better.”

That report came after two high-ranking Under Armour executives left under strange circumstances. Scott Plank, Kevin Plank’s brother, left in 2012, allegedly amid accusations of sexual misconduct (and in 2018 he was accused of exposing himself in the lobby of a condo building); Kip Fulks, Kevin Plank’s cofounder and college friend, left in 2017 after disclosing to HR a relationship with a subordinate.

Under Armour is by no means the only company dealing with such issues: McDonald’s ousted its CEO Steve Easterbrook last week over a consensual relationship with an employee that violated company policy, and Google parent company Alphabet is currently reinvestigating how it handled sexual misconduct allegations against some of its former executives. But for Under Armour, the cultural issues have come on top of poor financial performance, putting added pressure on Plank. When the company announced last month that he will step down at the end of the year, some analysts said the recent cultural problems, more than sales declines, were the final straw.

Make no mistake: There is a lot Under Armour did right for a long time, hence the incredible streak of 27 straight quarters of 20% sales growth. But when that streak ended, it came to an abrupt and sustained halt.

Under Armour Class A shares in 2019, through Nov. 8.

The stock, once a Wall Street darling, is down 50% in the past five years and is now trading at around $17.70. It was on a comeback in 2019 until news of the federal probe, and is now negative for the year.

When the next CEO Patrik Frisk takes the reins on Jan. 1, he has to first get the company out from under the federal investigation, then focus on the situation at home in America: footwear; women’s products; more colors and styles; and make a new pitch to kids.

Daniel Roberts is the sports business writer at Yahoo Finance. Follow @readDanwrite on Twitter.

Read more:

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The case for — and against — Under Armour selling itself

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Under Armour lost money in 2017

Under Armour: ‘We’re pivoting’