Once-Beloved Name Is Poised for a Long-Overdue Turnaround
The company's fall from grace has been steep, but I'm taking a small stake using a strategy offering potential upside of 15%.
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Few previously prominent consumer icons have had such a fall from grace over the past decade as Under Armour, Inc. (UA) (UAA) . The stock trades for pennies on the dollar to where it was during the first Trump administration. Under Armour and its founder Kevin Plank certainly have had their misadventures over the past decade.
However, as Stephen Guilfoyle highlighted this week, UBS now sees Under Armour as "one of the world's best-known and liked athletic wear brands and adds that investors are 'materially' undervaluing the brand," with the firm identifying the company as "a potential turnaround story." Value investor Fairfax Financial Holdings must see the same type of scenario as they recently boosted their stake in the company to around 16%, up significantly from 9% previously.
Management at Under Armour has a plan in place to narrow its focus on its top 10 products. It also plans to strengthen its direct-to-consumer channels and move to eliminate heavy discounting to move inventory. This is estimated to result in revenues falling approximately 5% in FY 2026 (ending March), after declining 9% in FY 2025. As a result of these efforts, margins should improve noticeably. The company has already reduced its SKUs by one quarter.
Under Armour has also just brought in a new CFO to assist in these efforts. While sales were down 8% in North America on a year-over-year basis in Under Armour’s last reported quarter, revenue did increase in the low teens in the smaller Latin America and EMEA regions.
Like most apparel concerns, Under Armour is still navigating through the additional costs from the new tariff regime of the current administration. That said, recurring SG&A expenses are projected to decline at a mid-single-digit rate this year, primarily driven by lower marketing costs and savings from restructuring.
As UBS noted within its recent upgrade around Under Armour’s potential turnaround, the company has one of the best-known brand names in the industry. It is also trading at a large discount to its peers. Under Armour should remain profitable as the management tries to put the company back on a growth path. The company's balance sheet is also good shape.
All in all, Under Armour has turnaround potential and I'm willing to take a small stake in it via covered call orders while awaiting more signs progress is being made. What's more, the options against the equity are very liquid, making the stock a solid covered call trade.
Option Strategy
This is how one can initiate a holding in UA with a covered call order. As a reminder, covered-call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Using the July $5 call strikes, fashion a covered call order with a net debit in the $4.30 to $4.40 a share range (net stock price - option premium).
This strategy provides downside protection of 20% with upside potential of 15% over the option duration even if the stock trades down 9%.
At the time of publication, Jensen was long UA.
