Kevin Plank Is Back as Under Armour CEO

In this podcast, Motley Fool contributor Jason Hall and host 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.

Motley Fool analyst Bill Mann talks to Pagaya CEO Gal Krubiner about using AI to change the world of fintech.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on March 14, 2024.

Deidre Woollard: The Prodigal CEO returns at Under Armour, Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Woollard here with Motley Fool contributor Jason Hall. Jason, how's your Thursday going?

Jason Hall: 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 interesting things.

Deidre Woollard: 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 Linnartz a full year. I don't know and this isn't the first time that he has handed over power and taken it back rather quickly, although Patrik Frisk, did last about two years. What do we think here, is this like Schultz-Iger syndrome is that what's happening here that he just can't let go?

Jason Hall: I love that. I absolutely love it, but I will say this in defensive Schultz, Schultz needed to come back. The second time Schultz came back as a issue of they just screwed up. They didn't do succession planning really well. Maybe we could certainly call this Iger syndrome. I think that's fair. There's this idea of trying to, I think recapture what Under Armour was for its first decade as a public company.

The company under the vet from the time that Kevin Plank founded it, let 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 for I believe it was about 10 years straight. It was earning a remarkable run of 20-plus percent growth, the very few companies ever get. If you're Kevin Plank, you can't help but think, I've still got the magic. I can get us back to growth.

Deidre Woollard: Yeah, maybe. Part of the reason that they had, that run was because they came out with that fabric and it was very popular. Then they started discounting the brand and I think that was a big part of it. Do you think that it's just he's going to be able to turn it around based on his power of his personality? The market certainly doesn't seem to think so.

Jason Hall: Yeah, so let's go back in time. I'm fortunate and unfortunate enough that I followed the company for over a decade at this point, and 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. They added more products. Ironically, I'm wearing an Under Armour shirt right now, Deidre.

Deidre Woollard: Appreciate that [laughs].

Jason Hall: 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.

Deidre Woollard: Yeah.

Jason Hall: 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 thing.

Deidre Woollard: It was a big thing.

Jason Hall: Yeah.

Deidre Woollard: But that's for them, unfortunately.

Jason Hall: That's the thing like the competitive landscape, frankly has changed substantially over the past five years. Think about 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 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, 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. A lot of what Under Armour thought its core customer was, are wearing Lululemon's as well. It's a much tougher environment now than it was when Plank left two CEOs ago, as you mentioned.

Deidre Woollard: 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?

Jason Hall: People that tell you they're humble or not humble.

Deidre Woollard: Facts.

Jason Hall: I don't know what else to say, but here's the reality. This is somebody that has 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% 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 four members just by the stroke of his votes. It's going to be interesting to see if he did learn anything. Stocks cheaper now that it wasn't the company IPO Deidre, it's, 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.

Deidre Woollard: 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. I love this company. The growth has been really astounding. This is sports stores. You wouldn't think that this would be having such a big run-up, but it really has and so many retailers are shrinking their footprint.

The department stores are getting smaller, DICK'S going the opposite direction. They've got house of sport, which is their experiential thing with golf simulators and rock climbing walls and all sorts of cool stuff. But they're also doubling down on what they call their 50K stores. They're 50,000 square foot stores adding more shoes, adding more experiential stuff. This is a great company. I do worry a bit though, when I see them taking so much space in a world dominated by e-commerce. They have a strong e-commerce arm, but this still seems like a big swing to me.

Jason Hall: 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, it's business was when Sports Authority went out of business. That was a 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. As those things were happening, while 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 generated 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 haven't really big omnichannel strategy, I have to. I want to own the customer as much as I can. But you know what? If I'm a consumer and I need to have my tennis racket restrung and I take that to DICK'S because they do that. I'm not going to deal with Nike's omnichannel 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. The having that ecosystem

I think is still 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, 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 with local recreational sports groups for group discounts and things like that to create awareness, bring people into the stores and then the experience and the store gets them coming back.

Deidre Woollard: Yeah. You hit on something there with the soccer cleats because it is discretionary, but it's also tied to kid's sports. When it comes to your kid's sports, it doesn't feel discretionary.

Jason Hall: It's not discretionary.

Deidre Woollard: If you've got a kid who's playing, you're going to get them the equipment they need.

Jason Hall: Yeah. It's the equivalent of the social security line item on the federal budget. It's not discretionary.

Deidre Woollard: Well, yeah, it gives the company, I think a little bit more security than maybe just traditional sports.

Jason Hall: Yeah, no, it does. But I think the key is how disciplined and focused they are, where we saw. You can say sure they are taking some big risks with expanding to these bigger store footprints, which are going to increase operating costs and that thing. But it's very focused on what their core business is. 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 in one up on Wall Street. I think that what DICK'S 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 require 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. If it doesn't work, not only did you miss out on that, but you missed out on resources, you didn't put it what you are really good at.

Deidre Woollard: 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've got results from LNR last night. One of the larger home-builders in the US. It's interesting interest rates. They're still keeping things down a bit, but new orders were up 28%. Now, they have had to play with the pricing to make that work using incentives and things like that. But it feels like they're getting confident enough, even in this interest rate environment to really start increasing production. You and I've talked about how home-builders need to build, but they're often not quite ready to do. Seems like LNR might be now.

Jason Hall: Yeah, I think so. Deidre, I might be the only person on the planet that's more bullish on home-building than you. 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, there was a potential for home builders to go through a collapse over the past year-and-a-half and they didn't because they moderated their build and didn't go crazy about acquiring a bunch of land and getting ahead of the market. When we did see new home sales slow during interest rates, they were fine.

They were just depleted inventory. They weren't caught with a bunch of spec housing that nobody could buy. But the bottom line is that what we've seen is it's 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 3Ls work. Of course, I'm not talking about location, location, location. Those are the 3Ls of real estate within that subset is land, labor and lumber.

They've all done a good job of making sure there are markets where the affordability as a builder can work and match up with the demographics of the buyers like the Sun Belt, parts of the West, parts of the Rockies, parts of the Mid-Atlantic there's opportunity to ride. They've done a pretty good job and we may start to see Midwestern plains over the next decade. Some areas where people start moving to those areas because they are affordable and, well, they can work remotely and live in those areas maybe with their family, I think that's interesting.

Deidre, I want to throw out a couple of stats, really quick. Single-family home sales, the latest data, 3.6 million seasonally adjusted. Inventory works out about a three-month supply. Think that three-month supplies about a half what the healthy market over the past 40 or 50 years, usually like 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 two-and-a-half million now with the inventory or population growth. 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 under built decade in the past 100 years in America in terms of housing. 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.

Deidre Woollard: Basically, and until existing home supply shifts and it doesn't look like it's going to anytime soon. New home builders really have the run in the market.

Jason Hall: Well, there's a lot of pressures on the existing market that are constraining inventory. One is retiring place, has become more common. We've seen a lot of retirees that don't want to leave where they are. They have friends, relationships, activities they are involved in. The silver tsunami we were all expected were everybody in the Northeast was going to move to the Carolinas or Florida and 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 have tons of equity now, but even downsizing, they'd have to take on a mortgage and it would increase their costs. There are still some people that are trapped there. Then I think also, in some markets you have corporate ownership of single-family homes for rentals that's grown substantially over the past decade. There's a lot of inventory that may never get freed up and again, comes back to home builders.

Deidre Woollard: Absolutely. Something we'll be watching this spring. Thanks for the time today, Jason.

Jason Hall: Absolutely.

MALE: Did you know that even if you have a 401K for retirement, you can still have an IRA? Robinhood has the only IRA that gives you a 3% boost on every dollar you contribute when you subscribe to Robinhood Gold. But get this, now through April 30, Robinhood is boosting every single dollar you transfer in from other retirement accounts with a 3% match. That's right, no cap on the 3% match. Robinhood Gold gets you the most for your retirement thanks to their IRA with a 3% match.

This offer is good through April 30, get started at robinhood.com/boost subscription fees apply and now, for some legal info. Claim as of Q1 2024 validated by Radius Global Market research, investing involves risk including loss. Limitations apply to IRAs and 401Ks, 3% match requires Robinhood Gold for one year from the date of the first 3% match, must keep Robinhood IRA for five years. The 3% matching on transfers is subject to specific terms and conditions, Robinhood IRA available to U.S. customers in good standing.

Deidre Woollard: Can AI decide who helps get along? Bill Mann talked to the Pagaya CEO Gal Krubiner, about his company's business model and the future of Biotech. Programming note this interview was recorded on March 1st.

Bill Mann: We could start with brass tacks. On your website, Pagaya describes herself as a financial technology company which uses AI to transform the way your partners approve and acquire customers. Let's just say that I'm a mansion who has just landed on Earth. I don't have any knowledge of credit ratings, risk, asset-backed security markets. I've gotten here, so maybe I know AI, but otherwise, I don't understand what this industry is at all. What is the perceived need the Pagaya is trying to solve? Where do you fit in this market?

Gal Krubiner: The simplest way to think about it is really from what the U.S. consumer is really looking for. 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, they're worth trillions of dollars in capital markets, that money is moving in at 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 is either are going to get declined or not to get the amount of money that is looking for. What Pagaya comes into all of that, is really trying to shrink that number. We're 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.

Bill Mann: When you talk about a 42% number of people who are applying for credit 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.

Gal Krubiner: Yes, but let me go a little bit deeper into that.

Bill Mann: Please.

Gal Krubiner: When you think about the world of banks, banks have a very restricted credit box that is set mainly by there need to be a very strong depository institution. The regulator, while imposing very strict guidelines into what can be considered as a bore well 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.

Even very good income earners in a great bore wells that are not considered risky at all. That could have 687 FICO could some reason or another, maybe because they had onetime in their past bankruptcy, will be out of the financial ecosystem. That gap, which is not correlated to actually the risk of this bore wells, 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 hundred thousand dollar earners, they have 17 years of credit history, they has 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 bore wells that are going to a lender that are getting declined for not really the good reasons that are actually correlated to risk.

Bill Mann: There's something 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 Pagaya open it up so that the lenders are able to take on that credit?

Gal Krubiner: The first thing that we did and it was very innovative, was not to go through the roots of creating another lender. Our business model is not a B2C business. We are not going and offering credit to people. We are actually enabling other lenders to provide the credit through their assistance. If you think about it, let's take a real lifetime example.

Bill Mann: Fantastic.

Gal Krubiner: Let's assume Bill, you are going now to one of our partners, it 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 $10,000 loan. For whatever reason, the restriction in the US bank needs for you to have 750 FICO, and let's assume you had just a 700. In that moment in time before Pagaya exist, you will just get a rejection. After US bank become a partner of Pagaya in veterinary anytime, we are gonna get all your financial history through the credit bureau, for which you allowed us to use.

We'll analyze that and more likely than not, we'll find you as well that actually deserve together 10,000 or more. We'll attach to interest rate. We'll the attached a term to you. Then we'll send it to US bank to give you that offer on their behalf. When US bank is actually offering you that, you do not even know that Pagaya exists. That's the beauty of it. That he doesn't change at all the way you use to consume your financials, your credit.

Once you are approved and you said, yes, I want to get that type of a loan, you're becoming a US bank customer, and you're going to have very good experience with US bank as your main bank. That instead of getting a decline in moving to a different bank, you're going to stay there customers. Now on the back end of it, what Pagaya does is looking for an investor that will contribute the $10,000 because we are telling him that actually bill is a great bowl and a bowl they're going to pay his interest rate and the principal and everything and greater good retail for them.

So we are using the balance sheets of the big institutional investors in the world. That they're looking to get access to consumer credit and good bowls 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 want it, you got it from the lender that you are seeking to get it from.

Bill Mann: In finance in general, I tend to have alarm bells that go off in my mind when you start thinking and this is only because it's solely blown up the economy a couple of times. When you talk about fast growth and innovations. Financial innovations sometimes come with a fuse attached to them.

So 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 a good 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?

Gal Krubiner: So first of all I may agree with you. I think there is a reason to what I said before that the Fin-tech is starting with the fin and not with the tech. You need to be financially savvy to run financials companies, even if tech is what drives them. When you come to your question, it's really about how you design that. By definition, we are risk caters, and financial guy, you need to be a risk cater.

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, oh, we don't have enough money. Funny enough, as simple as it sound that is the biggest factor that put companies in trouble when to your point, the word is getting a financial heart attack.

Bill Mann: Absolutely true.

Gal Krubiner: So what we did in COVID than the way we designed ourselves even before that, is when we are going into these big letters that you said the ABS markets, but 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. That is very different, which will use the risks by 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 head of time. And then if the world he's going through and heart attack, we can pose, 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 upfront, et cetera. 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.

Bill Mann: So I'm going to probably redescribe 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 aw-edging 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 the bumble of this market. You're just matching these loans into a pre-existing vehicle that has already been funded. Thank you

Gal Krubiner: Fifty transactions already in that format, 50, five, zero. Twenty-plus billion-dollar of funded loans in three different markets auto loans and POS and continuing to count as we build our scale to the march toward the $25 billion that I just mentioned.

Bill Mann: Yeah, that's not an AI story though, that's a trust story. How how do you go about developing those relationships with the credit market so they will say, OK, sight unseen, you just put some stuff in there and then we'll take, 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.

Gal Krubiner: So I think it's a combination of few. The first, let me share with you who were the first participant that designed it or was the consumer for us in that it was GAC. Solving a west fond of Singapore back in December 2018. So the ability to convince big institution and investors, the checks, your ability to do that.

Counter-checking the tires is the first important piece to make it to a mass distribution way. The second piece is to be able to repeatedly do it in a very stable way. 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 happen in the beginning. So a lot of it is disciplined.

The therapist is to listen to your customers if they are looking for A or B or C, not to ignore them. To be able to drive through our time, this structure and their loans that are being originated toward 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 brands, that you build. It come with consistency and it come with results. That's what we're doing.

Deidre Woollard: As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Deidre Woollard. Thank you for listening. We'll see you tomorrow.