Motley Fool Hidden Gems Investing - Under Armour CEO Walks The Plank

Episode Date: March 14, 2024

The old CEO is the new CEO at the athletic brand, but can he turn the ship around? (00:21) Jason Hall and Deidre Woollard discuss: - Why Kevin Plank is back in the CEO seat at Under Armour. - What makes Dick’s Sporting Goods so resilient. - The making of a perfect storm for homebuilders. (15:42) Bill Mann talks to Pagaya CEO Gal Krubiner about using AI to change the world of fintech. Companies discussed: LEN, PGY, DKS, UA, UAA Host: Deidre Woollard Guests: Gal Krubiner, Bill Mann, Jason Hall Producer: Ricky Mulvey Engineers: Kyle Carruthers, Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

The Prodigal CEO returns at Under Armour. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Willard here with Motley Fool contributor Jason Hall. Jason, how's your Thursday going? It's going awesome. I'm really excited to be on. We've got some fun things to talk about that you and I both think are very, very, very interesting things. Yeah, let's begin with that. Because the thing that caught my attention yesterday afternoon was the big news that Under Armour founder Kevin Plank, he's back in the CEO seat. He didn't even give the outgoing CEO, Stephanie Lenartz, a full year. So I don't know. And this isn't the first

time that he has handed over power and taken it back rather quickly. Although Patrick Frisco did last about two years. So what do we think here? Is this, is this like Schultz-Iger syndrome? Is that, is that what's happening here that he just can't let go? I love, I love that. I absolutely love it. But I will say this, I will say this in defense of, of Schultz. Schultz needed to come back. The second time Schultz came back is a, is a, is a issue of they just screwed up. They didn't do succession planning really well. Maybe we could certainly call this Iger syndrome. That's, That's for, I think that's fair. So there's this, there's this idea of trying to, I think, recapture what Under Armour was for its first decade as a public company, right? The company

under the vet from the time that Kevin Plank founded it, led it through IPO through maybe about a year or so before the end of his first tenure. Deidre, they grew revenue 20% year over year every quarter every quarter for i believe it was about 10 years straight it was in a remarkable run of 20 plus percent growth that very few companies ever ever get and if you're kevin plank you can't help but think i can i can i've still got the magic i can i can get us back to growth? Yeah, maybe. I mean, part of the reason that they had that, that run was because, you know, they came out with that fabric and it was, it was very popular. And then they started kind of discounting the brand. And I think that was, was a big part of it. So, I mean, do you think

that it's just, he's going to be able to turn it around based on his, his, the power of his personality? I mean, the market certainly doesn't seem to think so. Yeah. So let's go back in time. Um, I'm fortunate and unfortunate enough that I followed the company for over a decade at this point. And the, the interesting thing about that initial run-up is the company was successful. You talked about with their charged cotton, I believe it was called the original Under Armour shirt, right? And they added more products. And ironically, I'm wearing an Under Armour shirt right now, Deidre, as we record this, but the thing that began to happen, they expanded into other lines that they had some success with. They had success with running shoes and basketball

shoes. They've had some success there. But then you remember Connected Fitness? That was going to be a thing. Hundreds of millions of dollars. I believe it was close to $500 million. The company ended up writing down all of the goodwill related to their Connected Fitness initiatives. Do you remember athleisure that was going to be a big a big thing that's it was a big thing yeah yeah but not so much for them unfortunately more for a little lemon and that's the thing like the competitive landscape has his frankly has changed substantially over the past five years think about the the changes in the brick and mortar strategy that's foreshadowing we're going to talk about that next but the brick and mortar distribution channels have shrunk that hurt under armor a lot

That hurt Under Armour a lot. You go back to some bankruptcies that happened with some small regional sporting goods companies. And then of course, sports authority going bankrupt and being liquidated, right? It didn't come back. That's a lot of retail channel that the company lost. Since then, we've also seen On Fitness become a thing with their shoes. Lululemon, talking about athleisure, Lululemon. A lot of men wearing Lululemon too, right? So a lot of what Under Armour thought its core customer was, are wearing Lululemons as well. So it's a much tougher environment now than it was when Plank left two CEOs ago, as you mentioned. The only other thing I'm thinking about is you showed me his LinkedIn post.

He talked about being humble. I'm not so sure he's humble. Tell me, is he humble? Are we going to see a new Kevin Plank? People that tell you they're humble are not humble. Facts. I don't know much what else to say, but here's the reality. This is somebody that has a 65% voting share of the company. He doesn't own 65% of the company. I've been hearing a lot of analysts saying he owns 65% of the company. He doesn't.

He has super voting shares. He controls the company. Yeah, he's giving up the chairman seat to come back as CEO. That was probably part of the negotiation with the board that he would give that up. But still, he has de facto control. he can replace the board members just by the stroke of his vote. So it's going to be interesting to see if he did learn anything. Stock's cheaper now that it wasn't the company IPO, Deidre. It's remarkable that it's happened, but it's a different game. It's a different landscape than it was

when he was growing the company and when he left the company as CEO the first time. Well, let's keep it on the sports beat for a minute because I want to talk about Dick's sporting goods results that came out today. Oh man, I just, I love this company. The growth has been really astounding. I mean, this is sports stores. You wouldn't think that this would be having such a big run-up, but it really has, you know, and so many retailers are shrinking their footprint. You know, the department stores are getting smaller. Dick's go in the opposite direction. So they've got House of Sport, which is their experiential thing with, you know, golf simulators and rock climbing walls and all sorts of cool stuff but they're also doubling

down on their what they they call their 50k stores their 50 000 square foot stores you know adding adding more shoes adding more experiential stuff and this is a great company i do worry a bit a bit though when i see them taking so so much space in a in a world dominated by e-commerce i mean they have a strong e-commerce arm, but this still seems like a big swing to me. I think it makes sense, though. In the pre-planning we were talking about today, potentially have a brand-dependent footlocker risk. It's interesting, but I don't know that that's necessarily the case, Deidre, because we talked about with Under Armour, one of the things that started to undermine Under Armour, its business, was when the Sports Authority went

out of business. That was a big, big blow. They signed a deal with Kohl's to try to establish some expanded distribution. Well, Kohl's is a discount retailer, so diametrically opposed with what Under Armour's pricing power and strength had been before that. And as those things were happening, well, Dick's was well-established, pretty well-run, managed a good balance sheet, always generated operating cash flow. They've never, since they've been a public company, not generating positive operating cash flow, that's hard for any retailer, especially when you're talking about the kind of retail that is the most on the edge of discretionary, that they've been able to do that. And they were in the right place at the right time.

As those other retail outlets were disappearing, guess what? If I'm Nike, if I'm Adidas, if i'm a big sporting goods brand at all i have a really big omni-channel strategy i have to and i want to own the customer as much as i can but you know what if if i'm a consumer and i need to have my tennis racket restrung and i take that to dicks because they do that i'm not going to deal with nike's omni-channel internet strategy for something like that but you know what i might do i might see nike's newest tennis shoes and say you know what i'm going to buy them Um, so the, the, the having that ecosystem I think is still really, really powerful and adding the experiential stuff is smart, but I think there's still some benefit for sporting

goods because it is the kind of retail where I've got a kid, you know what, if my kid blows up his soccer cleats and he's got a game tomorrow, we're going tonight to buy cleats and we're going to go to Dick's speaking of Dick's has done a really good job of partnering like with local rec, um, uh, recreational sports groups for group discounts and things like that to create awareness, bring people into the stores and then the experience in the store gets them coming back. Yeah. I mean, you hit on something there, uh, with the soccer cleats because it is discretionary, but it's also tied to kids sports. And when it comes to your kids sports, it doesn't feel discretionary. It's not just, no. Yeah. If you've got, if you've got a kid who's, who's

playing, you're going to get them the equipment they need. Yeah. It's the equivalent of the social security line item on the federal budget. It's, it's not discretionary. Well, yeah, it gives, it gives the company, I think a little bit more security than, than, than maybe just traditional sports. Yeah, no, it's, it, it does. And it, but I think the key is how disciplined and focused they are where we saw, and you could say, sure, they are taking some big risks with expanding to these bigger store footprints, which are going to increase operating costs and, and that sort of thing. But it's very focused on what their core business is, right? You're not going into something that's a little adjacent and pulling away resources in such a way that if this doesn't work, it's

going to be a double-edged sword. Peter Lynch warned us about diversification instead of diversification 25 years ago and went up on Wall Street. And I think that what Dix is doing is doubling down on what they're really good at versus, sadly, what we saw with Under Armour with some of their other moves. They seemed adjacent. They looked like they were really aligned, but they required different skill sets and you have to hire people with different skills. So now you're taking resources away from what you're good at to develop new skills. And if it doesn't work, not only did you miss out on that, but you missed out on resources. You didn't put what you were really good at. Well, let's switch over because one of the reasons I want to talk

to you today is you love home builders. I love home builders. We got results from Lenar last night, uh, one of the larger home builders in the U S you know, it's, it's interesting interest rates. Uh, you know, they're, they're still keeping things down a bit, but new orders were up 28%. Now they kind of have had to play with the pricing to, to make that work using incentives and, and things like that. But it feels like they're getting confident enough, even in this interest rate environment to really start increasing production. Now you and I have talked about how homebuilders need to build, but they're often not quite ready to do so. Seems like Lenar might be now. Yeah, I think so. Deidre, I might be the only person on the planet that's

more bullish on homebuilding than you. But the math says, yes, it's time. I think the question is how much. We know their orders are up a ton. What we saw, interestingly, was there was the potential for, for home builders to kind of go through a collapse, um, over the past year and a half. And they didn't because they really moderated their build and didn't go crazy about acquiring a bunch of land and getting ahead of the market. So when we did see new home sales slow during interest rates, they were fine. They just depleted inventory, right? They weren't, they weren't caught with a bunch of spec housing that nobody could buy. So, but the bottom line, I think is that what we've seen is it's really market-specific, hand grenades and home building. You have to have

really good proximity to deliver. And the top 10 home builders have pretty much all positioned themselves in the markets where the economics of the three L's work. Of course, I'm not talking about location, location, location. Those are the three L's of real estate. Within that subset is land, labor, and lumber. So they've all done a good job of making sure there are markets where affordability as a builder, uh, can work and match up with the demographics of, of the buyers, like the Sunbelt, uh, parts of the West, uh, parts of the Rockies, parts of the mid Atlantic. Um, there's opportunity to, right. So they've done a pretty good job. And I mean, we may start to see Midwest and Plains over the next decade, some areas where people start moving to those

areas because they're affordable and well, they can work remotely and, and, and live in those areas, maybe where they have family. So, I think that's really interesting. Deidre, I want to throw out a couple of stats really quick. So, single-family home sales, the latest data, $3.6 million, seasonally adjusted. Inventory works out about a three-month supply. I think that three-month supply is about a half what the healthy market over the past 40 or 50 years. Usually, six months is the number that we wanted to see. But here's the rub. Existing inventory is actually down a lot more than that. Usually, $2 million. And it should be probably like two and a half million now with the inventory or population growth. So inventory is down so much

more. And what that means is that that vacuum of supply, that's new home builders. The past decades, probably the most underbuilt decade in the past hundred years in America in terms of housing. So put it all together. And I think this is still a moment for home builders to do well. They figured out the environment. They figured out the cost. They know where to be. Yeah. Basically, until existing home supply shifts and it doesn't look like it's going to anytime soon, new home builders really, really have the run of the market. Well, there's a lot of pressures on the existing market that are constraining inventory. One is retire in place has become more common, right? We've seen a lot of retirees that don't

want to leave where they are. They have friends, relationships, activities they're involved in. and the silver tsunami we were all expected where everybody in the Northeast was going to move to the Carolinas or Florida. It hasn't happened, right? It hasn't happened to the degree that we expected. At the same time, too, rising interest rates. This affects a lot smaller portion of the existing inventory than I think most people realize. But there are people that, well, they have tons of equity now, but even downsizing, they'd have to take on a mortgage and it would increase their costs. So there are still some people that are kind of trapped there. Then I think also in some markets you have like corporate ownership of single family homes for rentals.

That's grown substantially over the past decade. So there's a lot of inventory that may never get freed up. And again, comes back to home builders. Absolutely. Yeah. Something we'll be watching this spring. Thanks for the time today, Jason. Absolutely. You just found out that your sales team is at risk of missing quota. Don't panic. Just ask Rippling AI.

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That's r-i-p-p-l-i-n-g dot a-i slash f-o-o-l. Sign up for exclusive access today, rippling.ai slash fool. Can AI decide who helps get a loan? Phil Mann talked to Pagaya's CEO, Gal Cabriner, about his company's business model and the future of fintech. Programming note, this interview was recorded on March 1st. We can start with brass tacks. So, on your website, Pagaya describes yourself as a financial technology company which

uses AI to transform the way your partners approve and acquire customers. So, let's just say that I'm a Martian who has just landed on Earth. So, I don't have any knowledge of credit ratings, risk, asset-backed security markets. I mean, I've gotten here, so maybe I know AI okay. But otherwise, I don't understand what this industry is at all. What is the perceived need that Pagaya is trying to solve? Where do you fit in this market? So I think the simplest ways to think about it is really from what the U.S. consumer is really looking for. And when you think about it, the U.S. financial ecosystem is one of the biggest ecosystems in the world with, as we know, big banks that worth trillions of dollars and capital markets that money is moving in a very

high velocity. But still, subject to all of that, the pure regular American, when he's going to ask for a consumer credit for a credit to himself, there is a 42% chance that he's either going to get declined or not to get the amount of money that he's looking for. So, where Pagaya comes into all of that is really trying to shrink that number. We are trying to find ways to be able to reduce that number and to allow for more consumers to get more credit by doing what they do regularly every day. When they ask credit, we appear and we help them get that. When you talk about a 42% number of people who are applying for credit and and they are rejected. Your AI and your process identifies ones that the banks have,

for whatever reason, considered to be a high credit risk that you say, well, based on these factors and based on the data that we have, we think that they actually are compliant lending candidates for you? So, yes, but let me go a little bit deeper to that. So, when you think about the world of banks, banks have actually a very restricted credit box that is set mainly by their need to be a very strong depository institution. So, the regulator are imposing very strict guidelines into what can be considered as a borewell that they could lend to and what is not. Now, it happens to be, unfortunately, that within time, since back even to the 08 days of the crisis, that part is becoming smaller and smaller and smaller.

So, even very good income earners and great borrowers that are not considered risky at all, that could have 680, 700 FICO, could for some reason or another, maybe because they had one time in their past, a bankruptcy, will be out of the system, out of the financial ecosystem. And that gap, which is not correlated to actually the risk of these bowels, is something that the AI of Pagaya and really the pure systems are enabling to identify and to say, hey, there is a mistake here. These people are actually $100,000 earners. They have 17 years of credit history. They have been paying everything maybe by one time that they had some trouble when they were very young. There is no real reason why to deny and to exclude them

from the credit ecosystem. And that's where the place where we are creating the most amount of outcome. And it can be massive numbers. It can be almost 20% of boils that are going to a lender that are getting declined for not really the good reasons that are actually correlated to risk. There's something really interesting in what you just said, which is, and I hope we're not jumping straight into the weeds here, but when you're talking about lenders and the restricted credit box and the fact that the regulators create the limitations, how does a company like Pacaya? Or specifically, how does Pacaya open it up so that the lenders are able to take on that credit? So I think the first thing that we did, and it was very, very innovative, was not to go

through the route of creating another lender. So our business model is not a B2C business model. We are not going and offering credit to people. We are actually enabling other lenders to provide the credit through their systems. So, if you think about it, let's take a real lifetime example. Fantastic. Let's assume, Bill, you are going now to one of our partners. Happens to be that it can be a top five bank, such as U.S. Bank. And you went to the merchant, you went to the branch, you asked for a $7,000 loan, $10,000 loans. And for whatever reason, the restriction in the U.S. Bank needs for you to have a 750 FICO. And let's assume you had just a 700. In that moment in time, before Pagaya exists, you will just get a rejection. After U.S. Bank become a partner of

Pagaya, in that real time, we are going to get all your financial history through the credit bureau that you allowed us to use. We'll analyze that. And more likely than not, we'll find you as a good ball well, that actually deserve to get a $10,000 loan. We'll attach an interest rate, we'll attach a term to you, and we'll send it to U.S. Bank to give you that offer on their behalf. When U.S. Bank is actually offering you that, you do not even know that Pagaya exists. That's the beauty of it, that it doesn't change at all the way you use to consume your financials, your credit. And once you're approved and you said, yes, I want to get that type of loan, you are becoming a U.S. bank customer. And you're going to have very good experience with

U.S. bank as your main bank that instead of getting a decline and moving to a different bank, you're going to stay their customers. Now, on the back end of it, what Pagaya does is looking for an investor that will contribute $10,000 because we are telling him that actually Bill is a great borrower and a borrower that's going to pay his interest rate and the principal and everything and create a good return for them. So we are using the balance sheets of the big institutional investors in the world that are looking to get access to consumer credit and good borrowers like yourself, reducing that balance sheet risk on the bank so they are not violating any regulatory capital requirements, and making you very happy because not just that

you got your loan as you wanted, you got it from the lender that you were seeking to get it from. In finance in general, I tend to have alarm bells that go off in my mind when you start thinking about, and this is only because it's only blown up the economy a couple of times, when you talk about fast growth and innovations. Financial innovations sometimes come with them with a fuse attached to them. One thing that I'm interested in is the fact that since you started in 2016, you haven't gone through a full credit cycle yet, although you did, in fact, go through, I guess, what came close to being a global financial heart attack. How do you go through the process of filling in the gaps of what you don't know based on the changes in the credit

market that this type of innovation is bringing? So, first of all, let me agree with you. I think there is a reason to what I said before, that the fintech is starting with the fin and not with the tech. You need to be financial savvy to run financial companies, even if tech is what drives them. When you come to your question, it's really about how you design that. And by definition, we are risk haters. And you're a financial guy, you need to be a risk hater. The two main things that we did and we did very differently is the following. We are raising the capital before we provide the money to the people. We call it the pre-funded model. Very little to none have done it in the past. And then we're taking away the risk of one day, uh-oh, we don't

have enough money. Funny enough, as simple as it sounds, that is the biggest factor that put companies in trouble when, to your point, the world is getting a financial heart attack, i.e. COVID. Yeah. So what we did in COVID and the way we designed ourselves even before that is when we are going into these big letters that you said, ABS markets, but let's just call them the capital markets. Thank you. Let's just call them the capital markets. And then you're saying, I want to provide credit to the people. You are locking your future money to do so in advance. And that is very different, which reduced the risk by a bunch. This is the reason why we call our model balance sheet light.

It doesn't mean that we're not exposed to credit. It doesn't mean that we're not in the lending space. It doesn't mean that we're not financially savvy. It just means that how much we need to maintain to have a very long runway is very little compared to what we have. So in every period of time, we have hundreds of millions of dollars, if not billions, available to be lending ahead of time. And then if the world is going through a heart attack, we can pause, we can look, we can reassess, we can reprice. And therefore, we are taking a very big risk out of the table. Now, it doesn't come without a price.

It's a little bit more costly. You're paying for that money up front, etc. But the ones of us who've been through enough knows that this is a very small premium to pay for a very big headache to be taking away from you. So, I'm going to probably re-describe this in maybe a Dr. Seuss fashion. So, feel free to correct me. It's just fine. One of the big issues from the global financial crisis was that lenders were warehousing loans

and then awaiting the credit market to come in and take those loans and take them off their books. What you are saying is that you pre-form and take on the credit. And so then the creditors, it's almost like you're like the bumble of this market. You're just matching these loans into a pre-existing vehicle that has already been funded. And let's put numbers to it. Thank you. 50 transactions already in that format 50 5 0 20 plus billion dollar of funded loans in three different markets personal loan auto loans and pos and continuing to count as we build

our scale to the march towards the 25 billion dollar that i just mentioned gal that that's not an AI story, though. That's a trust story. How do you go about developing those relationships with the credit market so they will say, okay, sight unseen, you just put some stuff in there and then we'll take, you know, like, is it just simply the shared risk component where you retain some of the loans and so they understand that you're on the dance floor with them? So, I think it's a combination of a few. The first, let me share with you who were the first participants that designed it or was the consumer for us in that.

It was GAC, the Soviet Wealth Fund of Singapore, back in December 2018. So, the ability to convince big institutional investors that checks your ability to do that and kind of like checking the tires is the first important piece to make it to a mass distribution way. The second piece is to be able to repeatably do it in a very stable way. So we cannot allow ourselves to have very big deviation every time we're going. And we have already 50 examples of the way that we are closing that exactly or very close to what we're anticipating that to happened in the beginning so a lot of it is discipline the third piece is to listen to your customers if they are looking for a or b or c not to ignore them and to be able to drive throughout

time the structure and the loans that are being originated towards what are your investors are telling you explicit and implicit so to summarize these three is the word trust it's exactly what you said. But the word trust is coming with brand that you build. It comes with consistency and it comes with results. And that's what we're trying. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have former recommendations for or against. So don't buy or sell stocks based solely on what you hear. I'm Deidre Willard. Thank you for listening. We'll see you tomorrow. We'll be right back.