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Analyst report: Under Armour’s turnaround faces “significant” setback from coronavirus outbreak

Under Armour faces a “significant” setback in its turnaround effort because of disruptions caused by the new coronavirus outbreak, an analyst said Friday.

“COVID-19 disruption has been abrupt and significant," Jim Duffy, an analyst with Stifel, wrote in a report released Friday. "Store closures in both domestic and overseas markets have disrupted the spring selling season and produced inventory imbalances.

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“Additionally, school cancellations, job losses and social distancing measures are altering behavioral patterns,” he said.

Stifel and other experts had applauded the Baltimore-based brand’s plan to turn around sluggish U.S. sales, but “the growing list of near-term risks puts our optimism for shares on the bench for the remainder of 2020,” the report said.

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Stifel downgraded the Baltimore-based brand’s shares to hold and cut its 12-month target on stock price from $16 per share to $11 each.

Under Armour shares, which had been trading over $20 a share in January and early February, have fallen since and closed Friday at $9.44 each.

The Stifel analysts said they remain bullish on the sports apparel maker’s long-term prospects and new leadership under CEO Patrik Frisk, who took over in January to replace founder Kevin Plank. Plank has stayed on as executive chairman and brand chief.

Once the COVID-19 pandemic is under control, the brand’s momentum will hinge on stabilization in the sports apparel channel, re-balancing inventory levels and seeing “tangible evidence” of consumer appetite for new styles.

Under Armour had closed all 188 of its North American stores from March 16 through Saturday, calling the shutdown a precautionary measure to help stem the spread of the virus. Since Under Armour first closed its stores, most major U.S. retail chains also have shut down and have continued business online. Its website now says stores will be closed until further notice.

On Thursday, Under Armour said it has borrowed $700 million through an existing line of credit to prepare for the effects of the pandemic on its sales.

The company said it borrowed the funds “as a precautionary measure in order to increase its cash position and preserve liquidity given the uncertainty in global markets resulting from the COVID-19 outbreak.”

Under Armour faces not only lost sales from store closures, but lost brand exposure because organized sports have been canceled, Stifel said.

“We are all hoping umps can say “play ball” soon, but cancellation of organized sports removes a key showcase for marketing assets such as the sponsored teams who won’t get to play in the NCAA tournament and [baseball] athletes like Bryce Harper and Christian Yelich," he said.

Additionally, the cancellation of school and youth sports is expected to hurt demand both for Under Armour and retailers that carry its products, he said.

Inventory imbalances, meanwhile, could last into next year, hurting profit margins, while excess inventory at larger rivals, such as Nike, could crowd smaller players out of the marketplace, Stifel’s report said.

In its favor, Under Armour has cash on hand, additional borrowing capacity and strong banking relationships, Stifel said.

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“We expect Under Armour to navigate these challenges and regroup in 2021," the report said.

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