On April 3, Under Armour announced a series of steps that it intends to take in reaction to the “acute” shock caused by the coronavirus epidemic, and quantified the cost of its restructuring program. A few days earlier, two investment brokers, Goldman Sachs and Stifel, had reduced their projections for the company’s share price, feeling that the implementation of its turnaround strategy will take longer because of Covid-19. Moody’s subsequently downgraded its rating across the board.
Goldman Sachs cut its share price target for the company from $21 to $9 on March 25, just below its stock market quotation at the time, switching its recommendation to “neutral” from “buy.” Stifel reduced its target price for the next 12 months from $16 to $11, with a similar move from “buy” to “hold.” Following Under Armour’s April 3 announcement, its stock price dipped further, closing at $8.22, roughly in line with a drop in the stock market after March 31. It was at $21.0 last Dec. 31.
While noting some early signs of improvement in the Asia-Pacific area, which accounts for a relatively low share of the company’s turnover, Under Armour said on April 3 that it will extend the previously announced store closures. Also, it will temporarily lay off 600 employees at its U.S.-based distribution centers from April 12, while paying premium bonuses to those who will continue to work there.
The company noted that it will have paid up to four weeks of full wages to all employees at its stores and distribution centers since the crisis began. It also pledged to cover full health benefits for them for about two months during the layoff period. In contrast with the situation in certain European countries, temporary layoffs are not subsidized by the government in the U.S., and unemployed people don’t necessarily get health insurance benefits. Outside the U.S., Under Armour will take appropriate measures on a country-by-country basis, based on local regulations and the degree of the pandemic.
Meanwhile, the members of Under Armour’s board of directors and the company’s vice presidents will see their compensation reduced by 25 percent.
Furthermore, while withdrawing its previous guidance, the company reported that its board approved on March 31 a restructuring plan that had been tentatively laid out on Feb. 21 “to rebalance the company’s cost base to further improve profitability and cash flow generation.” Under Armour said that this plan will involve estimated pre-tax and related charges of $475 to $525 million in 2020. Aside from lease terminations and severance fees, the biggest item will be an impairment charge – to be taken in the first quarter – of about $290 million for the company’s now closed flagship store in New York.
In downgrading Under Armour’s stock, Stifel pointed to likely pressure on its margins, indicating among other things that inventory challenges may lead larger players like Nike to further “crowd smaller players out of the marketplace.” On the other hand, Stifel said that Under Armour, with more than $500 million in cash and the ability to borrow up to $1.5 billion, should have enough liquidity to weather the crisis.
Moody’s agreed that Under Armour’s liquidity remains very good after it drew down another $700 million from its revolving credit. The rating agency said it will downgrade the company further if its Ebit margin falls below 5 percent or if the Ebitda/interest ratio goes below 3.0 times. It may be upgraded if margins improve and if the Ebitda/interest ratio rises to 3.5 times.
Goldman Sachs mentioned “elevated near-term execution risk,” but conceded that Under Armour’s margins should improve in the longer term, as athletic and casual apparel is growing faster than other types of products.
Separately, on a positive note, a federal court judge in Baltimore dismissed a lawsuit launched two years ago accusing the company’s founder, Kevin Plank, of improperly profiting from the development of Under Armour’s new headquarters in Port Covington. Plank,who has other real estate investments, was the chief executive of the company at the time of the shareholder suit.
