Wall Street got a little jittery with the news on Wednesday afternoon that Under Armour was replacing its chief executive officer. Analysts said the announcement after the market closed that Patrik Frisk, president and CEO for the past two years, would exit the role on June 1 could potentially be the right decision, but will lead to uncertainty, at least in the near term.
The stock opened down on Thursday and continued to slide during the day, closing at $8.18, down 15.8 percent from the previous close of $9.71. Although the Dow was down again, it closed only 0.75 percent below the prior day.
The stock has actually been impacted since May 6 when Under Armour reported earnings that did not meet analyst expectations. The company reported a net loss of $60 million in the quarter, with an adjusted loss of $3 million. Revenue was up 3 percent over the same period last year to $1.3 billion.
In a report issued Thursday, Morgan Stanley analyst Kimberly Greenberger said the move to replace Frisk impacted the bank’s confidence in the turnaround and said she was wrong to upgrade the stock in February. She has now reduced the price target to $11 from $14. UBS said it believes the CEO transition indicates the company’s turnaround may not be progressing as well as expected.
John Kernan of Cowen and Company, agreed that the management shift “creates more uncertainty. The Under Armour narrative gets a new reset following a challenging stub quarter and initial guidance to start fiscal year ’23 with Patrik Frisk stepping down from his role as CEO,” he wrote. “Our $17 price target is 21 times fiscal year ’24 estimated earnings per share. We see a path to $1 in EPS by fiscal year ‘26, but expect macro uncertainty and a heightened competitive environment to create additional volatility in sentiment and the financial model.”
Simeon Siegel of BMO Capital Markets was a little more upbeat, writing that the CEO change “does add an element of uncertainty into the short term. Under Armour has done a remarkable job improving its business over the past few years, willing to cut inventory as others grew it, stem profitless sales, divisions, and endorsements and successfully lift margins. Retail is now feeling the other side of the ‘reverse inflation’ and it seems fair to assume investors will seek direction as the company works on its leadership plans.”
As part of his separation agreement, Siegel said, Frisk will receive lump-sum payments of $6.89 million, $1.3 million in consulting fees to stay on through September 2023 as an adviser and consultant, $238,000 for potential relocation costs, 18 months of COBRA coverage and outplacement services and tax preparation services for 2021 and 2022.
The bottom line, he said, is that Under Armour’s decision to “pivot CEOs presumably signals a desire to push past restructuring and reignite growth.” But he cautioned: “Although COVID-19 helped companies focus on profits over growth, it seems the board is ready for growth. But why? UA remains a large business, likely still under-earning, and we believe shares are too inexpensive. As it embarks on its next chapter, we hope it remembers that growth at all costs got it (and others) into trouble in the first place. At these prices, focusing on brand health can prove the easier path to upside.”
Stifel analyst Jim Duffy said the company is “at an interesting juncture,” and sees future value as “more dependent on revenue growth,” adding that a new leader “with a proven track record for unlocking incremental growth” could be the right thing for the business.
Frisk joined Under Armour in 2017 as president and chief operating officer when the company was faltering both in terms of sales and mired in scandals. The Swedish-born Frisk, who had served as CEO of Aldo Group and had worked at The North Face, Timberland and Vans, instituted a $200 million, five-year turnaround plan with a focus on bringing Under Armour back to its roots as a sports brand. He eliminated 2,500 wholesale accounts in North America, jettisoned many of the company’s long-tenured executives and doubled down on sports apparel, accessories and footwear rather than lifestyle apparel. He was named to succeed Plank as CEO at the beginning of 2020.
Until a permanent successor is named, Colin Browne, the current chief operating officer of Under Armour, will take over the position.