Analysts at Morgan Stanley might be overreacting to golfer and Under Armour (UA) endorser Jordan Spieth's meltdown at the Masters Sunday afternoon. Either that or they genuinely see weakness in the sports apparel company's fundamentals, as Morgan Stanley slashed the Growth Seeker holding's price target.
Citing slowing U.S. wholesale apparel sales growth -- particularly in the women's apparel segment -- the firm maintained its Underweight rating while cutting its price target in half, to $32 from $64.
"SportScan data shows -2% 1Q total UA US wholesale apparel growth and -7% for women's apparel: This is in-line with 4Q trends. Some argue SportScan doesn't capture all of UA's business, which is true. However, UA's own SEC filings show sales to its biggest customer, which we believe is Dick's Sporting Goods (DKS), were -8% in 4Q15," analysts at the firm wrote. SportScan data shows that Under Armour has lost apparel market share for the first time in three years.
According to Morgan Stanley, Under Armour could use a strong performance from a female endorser as the company's women's apparel segment continues to lag.
Much of the company's growth over the last three years has been due to the visibility of its top endorsers, but those endorsers have been male athletes.
Under Armour has been savvy in terms of which athletes it chooses to sign to endorsement deals. In fact, between Stephen Curry and Jordan Spieth, the company's roster of athletes had an unprecedented run of success last year. Curry won the NBA Most Valuable Player award on his way to also winning a world championship with the Golden State Warriors last season. In January 2015, golfer Jordan Spieth started the year off by signing a new 10-year endorsement extension with Under Armour after ripping up his old two-year contract. Three months later, Spieth won the Masters. He then won his second consecutive major at the U.S. Open on his way to winning the PGA Player of the Year and PGA Tour Player of the Year trophies in 2015.
"We doubt UA would argue that its women's apparel business is performing the way it wants. However, UA has a new team in place to improve the performance of that business. We expect a major new product assortment launch this fall which will be much more fashion-forward and athleisure-ish than anything UA has ever done. We also anticipate UA will have a major celebrity collaborator attached to the project," the Morgan Stanley note read.
Despite the headwinds presented by that lagging sector, Morgan Stanley is still bullish on Under Armour's management team, going so far as to call CEO Kevin Plank one of the most highly successful entrepreneurs of his generation. Overall it is still bullish on the company itself also, saying "of course" Under Armour is a terrific brand.
But the analysts added that Under Armour's "products for women are lacking the fashion component today's consumer is demanding and can now easily get from the multitude of new brands that have emerged as legitimate competition." While analysts noted that UA is attempting to fix this issue, it remains unclear if it will work. If not, the firm wrote that "it will be hard for UA to replace the growth it is expecting in this category." Women's apparel accounts for 20% of U.S. sales growth that Morgan Stanely analysts have forecast for the company over the next four years.
So, the magic Under Armour's team has shown in choosing athlete endorsers may need to be replicated once more with a woman. Maybe they can steal Mixed Martial Arts star Ronda Rousey away from Reebok. Or sign WNBA all-star Skylar Diggins to a shoe deal. Regardless of who they choose, Under Armour needs to pay greater attention its women's apparel segment if it hopes to reach its near-term sales goals.