Under Armour, other retailers can emerge from coronavirus with 'radically different' plans: BMO analyst

Under Armour reported a 23% decline in sales in the first quarter. BMO Managing Director Simeon Siegel weighs in on the company's earnings report and how retail is faring amid the coronavirus pandemic.

Video Transcript

ADAM SHAPIRO: I want to turn our attention to what's happening in retail. And to help us understand Under Armour and a few others, Simeon Siegel, BMO's managing director, and as well as Dan Roberts, is joining us. Especially with Under Armour, Simeon, want to ask you about something. In their most recent earnings report, they said they ended the first quarter with $959 million cash on hand. Is that enough to get them through not only the crisis in retail and COVID, but also their restructuring?

SIMEON SIEGEL: Hey guys. And Adam, it's such an interesting question. And to be honest, I didn't know what you were going to say when you talked about which thing they ended with. Because every one of their metrics is so interesting and so different. So to the cash point, it's enough. Why is it enough? Because the reality is, if we asked about expenses, if we asked about sales, if we asked about Capex, we're in this distorted period where for right now, almost all of the companies I look at, and the companies we know so well, actually don't have very many expenses. Because they've all put them on hold.

So I think the very first exercise here, in the first week, was figuring out, how do I shore up liquidity? How do I survive? And then after that was figuring out, once you've put defense on hold, what should this business actually look like? But if you're not paying rent, unfortunately, if you're not paying your employees, and if you're pulling back on the Capex, there's just not that much that needs to be spent right now.

DAN ROBERTS: Simeon, Dan Roberts here. Thanks for joining us. Some of the Under Armour numbers today were just brutal. You have sales down 23% in the quarter. North America sales down 28%. Apparel down 23%. And this is the sixth quarter in a row that Under Armour sales have fallen in North America, its home turf. So obviously, something for this brand is just not working. And you know, [INAUDIBLE] with the reigns. I felt like they just kept trying to double down on what Under Armour stands for. And obviously, the brand is resonating. Now you've got Patrick Frisk running things.

In the next year or so, once we emerge from coronavirus, what do you think Under Armour can and should do to turn things around? Maybe a major, major change is needed?

SIMEON SIEGEL: Yeah and that's interesting. I know we've spoken about it a lot. I think at the end of the day, there may be this opportunity to pull back and become smaller and healthier, but by essentially using a COVID-19 to cover. What I mean by that is, it's very hard for a public company to get out in front of everyone and say, you know what? We're too big.

But on the other hand, 2020, this is the year of retrenchments and resets anyway. So maybe we should use 2020 as the real year instead of '19. So to your point, you can have a big strategic shift, where the company can look at business that's essentially not profitable, and say, perhaps if I was a billion dollars less-- throwing out an example-- maybe we would generate profits. And a billion dollars less of sales but higher profits could be a huge win.

JULIE HYMAN: Simeon, it's Julie here. But is Under Armour a retailer that-- I mean, yes, a retailer can go out and do that. But I can't recall, off the top of my head, any retailer, or any company-- I mean, maybe with the exception of GE-- shrinking itself down. It's not very common for a company to come out and do something like that.

So looking at the management Under Armour has, what's the likelihood that they would take that strategy?

SIMEON SIEGEL: Yeah, it's a great point. Listen, the status quo, if every company takes COVID-19 and tries to get through it, then all we're going to end up with on the other end is the same damaged retail business with a few fewer department stores. On the other hand, if we look back over the last five years, you have companies like Ralph Lauren Koch and Michael Kors that did walk away from call it 20% of their business. And so the margin rates go up.

The interesting thing, when contrasting versus them-- they still have high profits. Under Armour essentially is not making money and I know it's a theme we've talked about. It's a theme that maybe I'm hoping that they think about. I think, to your point, they have not given any indication that they're going to look to come out of this a much smaller business.

But the other interesting thing about right, today, when we think about the earnings cycle that's going to happen now, and if we're back talking about this three weeks from now, there's just no new information. So you're in a tough spot if you have to report now. So Dan, to your point, you're throwing out we're looking at these sales numbers. All stores are closed, right? Of course, sales are going to be down. I think it's going to be much more interesting to see how these companies look two months out, when they've actually been able to say, OK, what can this look like as we start reopening? And I'm hoping that several companies within this coverage are actually thinking about, how do we emerge stronger, even if it's radically different?

ADAM SHAPIRO: Well Simeon, isn't it a race past the graveyard, though? I mean, in the case of Under Armour, they don't have the legacy debt, let's say, of JC Penney. And this is the weak JC Penney has to decide whether it's going to try and restructure or not. And there's just not an appetite, is there for-- you know, you could look at Macy's. You could look at JC Penney. You could look at Nordstrom-- to lend to some of these bigger retail outlets, is there?

SIMEON SIEGEL: And I think the common-- so I agree with you. And I think the common denominator there is, those are department stores selling other people's goods. So the question becomes, if you're thinking about brand equity, is there a level where, if it's your own, if you own the brand equity and now, in theory, can also own the customer because of the internet-- which was never the case over the last however many decades-- what is the viability of simply offering to sell someone else's product? I think if you're going to a bank and pitching that story, that's pretty difficult.

ADAM SHAPIRO: All right. Simeon, we appreciate your being here with us. Simeon Siegel as BMO's as managing director. It's always good to see you. Stay healthy, you and your family, during the COVID-19 crisis.

SIMEON SIEGEL: You as well, guys.