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Under Armour’s strategy ‘will not change that much’ with new CEO: Analyst

Morningstar Equity Analyst David Swartz joins Yahoo Finance to discuss the task ahead for Under Armour’s new CEO, the categories the athletic apparel company plays in, inventory issues, and opportunities to take market share.

Video transcript

BRIAN SOZZI: Let's get under the hood of Under Armour now. Shares in the retailer down over 50% since the start of the year, as it deals with a variety of headwinds from an inventory glut, fierce competition from Nike and Adidas and Lululemon, and a costly courtroom battle with the UCLA.

The bright spot for the coming year might well be incoming CEO Stephanie Linnartz, who's currently president over at Marriott. Though athletic apparel certainly fresh terrain for the new boss, her focus said to be boosting the group's digital offering. Joining us to discuss is David Schwartz, equity analyst at Morningstar. David, good to see you here. What are the top three moves you want to see from Stephanie coming out of the gate here?

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DAVID SWARTZ: I think there's a lot of focus on the digital strategy and on a loyalty program, getting more people to download Under Armour's apps and getting more connected to the consumer. I think there's also a focus on inventory levels and the supply chain, which has been a work in progress for Under Armour for the last few years. I think that's another high top priority.

And then another one would really be the product and increasing distribution. Under Armour is strong in some areas. They're weaker in other areas like footwear. There is a lot of opportunity, I think, for Under Armour to increase its distribution to retailers like Foot Locker, which have lost some Nike product and that may present an opening for Under Armour's footwear.

JULIE HYMAN: David, though, is CEO of Under Armour sort of, for lack of a better word, a doomed position, given the dominance of Kevin Plank, of course, the founder and chairman at the company? Is it really going to be a tough job for, really, anyone who would have stepped into that role?

DAVID SWARTZ: It is problematic, yes, because Kevin Plank is still the controlling shareholder. He's still very influential with the company. And the way that Patrick Frisk was dismissed earlier this year doesn't exactly bode well for an outsider CEO coming into Under Armour.

But one of the benefits that the new CEO seems to have is that she worked with the Marriott family at Marriott, so she does have experience in working with a controlling family, and that could help at Under Armour. I don't think that she'll be able to change the strategy very much. Under Armour has really been in restructuring mode for about five or six years. And that's really not going to change that much under a new CEO.

BRAD SMITH: Is the sentiment around Under Armour from a consumer perspective waning, remaining strong? What can they do to really prop up or engage that next wave of consumers, as even across lifestyle and performance, there seems to be even within the existing categorical players in athletic apparel and footwear, there seems to be a strategic approach that a lot of the competitors have to both of those categories, whereas Under Armour has largely been just in the performance category?

DAVID SWARTZ: Yeah, that's true. So Under Armour, for many years, has resisted complaints from the analysts and shareholders that it should really be getting more into athleisure and more casual sportswear. Now for a long time, Under Armour resisted that and said they would strictly focus on performance sportswear. Now recently, however, they have suggested they're going to release more casual product. And that will be something for the new CEO to handle.

But Under Armour does face a lot of competition there. There are so many strong athleisure companies like Lululemon and others that you've mentioned. And they really have a better market position right now than Under Armour does. So it's going to be a long time, really, before Under Armour becomes a major player in that area. I think Under Armour does have a strong customer base among youth, high school athletes, college athletes. That's really the strength of the company, is the teenager and college age market.

BRIAN SOZZI: And David, from what I can tell, the only line, apparel line inside of Under Armour that seems to be selling well consistently is anything made by the Rock. And I think the argument could be made that they have not utilized his brand pretty much at all. The products are constantly out of stock. Does Stephanie to reach out to him, and maybe they need to be doing more with someone like that?

DAVID SWARTZ: Under Armour has had trouble managing its inventory over the years. They've had trouble with their supply chain. So yeah, there have been times when they've been sold out of things. Under Armour has a large wholesale operation, so they don't have necessarily great control over their product as much as Nike does, which has a much larger direct-to-consumer business, for example.

So it makes it tough for Under Armour because they're dependent on orders from wholesale partners. And a lot of their own sales are really through discount channels through outlet stores. Under Armour does not have a lot of great full price retail sales of its own. And that's one thing that Under Armour will need to work on. And it doesn't have the partnerships. You mentioned the Rock, but it doesn't have the partnerships that Nike and Adidas have. And that's one of its problems.

BRAD SMITH: Yeah, and so within that digital strategy that you would put in your top three things that they need to work on, or at least that the new CEO needs to prioritize, how do you really prop up that digital strategy or drive some of the demand digitally when you don't have those other things that your competitors do?

DAVID SWARTZ: I think Under Armour does need to upgrade its product, offer a more diverse product line, more than just focus on, like, college football, which is sort of Under Armour's best known category. They're known for high school and college football. They need to diversify a little bit, try to get more into the collector market, maybe sign some new athletes. Under Armour's marketing strategy really has changed more than once over the last few years. So it's not really clear what it is all the time.

I mean, that's something that Under Armour really needs to nail down. But I do think that the company has fans. It's still a company with $6 billion in sales. They have opportunities outside of the US, especially in China, which is expected to be the largest sportswear market, certainly the fastest growing one. And Under Armour really needs to improve its international focus, too. It's not just the US consumer.

BRAD SMITH: Yeah, I would have expected to see some limited edition colorways of Steph Curry's old shoes, the best selling ones at least, and some of the utilization of the other athletes that they've been very popular with and have courted in the past. David, a pleasure to have this conversation with you. We're all going to see how they perform in 2023. David Swartz, equity analyst over at Morningstar, we appreciate it.