Consumer Preferences Rotating Away From Under Armour's Style; Analyst Downgrades Stock To Sell

A difficult and promotional environment within the apparel, footwear and textiles space prompted analysts at Deutsche Bank to downgrade Under Armour Inc (NYSE: UAA). The firm's Paul Trussell downgrades Under Armour's stock rating from Hold to Sell with an unchanged $17 price target.

Nothing Is Working Properly

The analyst's downgrade is based on a combination of:

• 1. Consumer preferences continue shifting from "lifestyle athletic wear" as opposed to Under Armour's "performance based style."
  2. Increased competition in the athletic space.
  3. Heightened promotional activity across the entire sector.
  4. A slowdown in Under Armour's direct-to-consumer segment.

Also, Hibbett Sports, Inc. (NASDAQ: HIBB), an athletic specialty retailer that accounts for 16.5 percent of Under Armour's total sales, said on Monday it expects second-quarter comps to be down 10 percent, the analyst added. This should be even more concerning for Under Armour's investors as the Street was modeling Hibbett Sports' stores to see just a 2-percent decline in comps and is a "reflection of the challenges the sector currently faces."

Long-Term Story Questionable

For Under Armour's stock to return, the company needs to return to a consistent double-digit growth rate. However, there are few drivers to support this outlook, the analyst also argued. Meanwhile, the company has "fumbled" in recent initiatives intended to spur growth, including a partnership to sell products in Kohl's Corporation (NYSE: KSS).

Finally, Under Armour could get crushed by a competitive onslaught from two ends. The first being industry titans like Nike Inc (NYSE: NKE) whose line of basketball shoes are equally compelling to Under Armour's Curry line but at similar to lower price points. Second, private labels such as Carrie Underwood's CALIA is making a major push to gain more shelf-space at some of Under Armour's most important retail partners.

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