Under Armour’s Road to Redemption

Under Armor is fighting to regain the supremacy of sportswear, but it hasn’t been easy.

The company has faced a myriad of challenges since 2016, ranging from SEC investigations to divestitures. The brand, which at one point had grown to compete with Nike and Adidas, suddenly collapsed in the face of declining sales and corporate fears.

In 2019, Under Armor released a five-year strategic growth plan. Development? Brand, brand, brand. From accelerating innovation in apparel to optimizing supply chain logistics to ensure customer satisfaction, the brand was the cornerstone of every element of the strategy.

The plan was met with skepticism at first.

Just one year after it took effect, former CEO Kevin Plank stepped down to become executive chairman of the board. Various executives – including Plank – have also been implicated in a scandal involving the use of corporate funds to spend nights at a strip club. These indiscretions, coupled with revenue growth from two to single digits, cast a shadow over any prospect of growth.

Over the past 12 months, however, Under Armor has made significant strides. The company beat income estimates, demonstrated branding improvements and achieved a number of its stated targets from the proposed 2018 turnaround. The third quarter of 2021 was particularly impressive:

  • Adjusted earnings per share: $ 0.31 vs. $ 0.15 expected
  • Turnover: $ 1.55 billion against $ 1.48 billion expected
  • Net profit: $ 113.4 million versus $ 38.9 million a year earlier
  • Direct to consumer sales: up 12% to $ 604 million

The Baltimore-based retailer is clearly showing signs of a resurgence, and from an outside perspective, CEO Patrik Frisk is performing flawlessly.

But do these profit numbers paint the full picture? Let’s dig.

The climb

If you look at a chart of the historic Under Armor share price dating back to its IPO in 2005, your eyes would immediately be drawn to a sharp, almost parabolic, rise from 2010 to 2016. During the period, the company’s share price increased by 1,048% – well beyond the stock market appreciation of competitors at the time:

  • Adidas: + 75%
  • Nike: + 283%
  • Lululemon: + 240%

Under Armor has even eclipsed Adidas as the second-largest sportswear brand in the United States by sales, while also posting impressive year-over-year revenue growth of 20% or more.

The company has also attracted a huge amount of sports talent, signing stars like Cam Newton, Steph Curry, Bryce Harper, Tom Brady and Jordan Speith. He inked a exclusive contract of $ 280 million over 15 years with UCLA to become the university’s official sponsor – the biggest contract of its kind at the time.

Under Armor has even ventured into the tech space with its acquisitions of MyFitnessPal, MapMyFitness and Endomondo for a combined $ 710 million. The thesis? Become an interconnected fitness company that not only dominates in apparel, but also impacts consumers’ daily lives through app experiences.

Where things have gone wrong

Have you ever walked into a Marshalls, wandered through the track section, and seen a plethora of UA shirts on the clearance rack? I have. This is because Under Armor has always been unruly in its inventory management.

Over the past five years, Under Armor has consistently maintained a lower inventory turnover rate than all of its major competitors. Inventory turnover – the number of times a business sells and replaces its products in a given time period – has been a problem because the business has high inventory levels with decreasing sales speed. Such a dynamic devalues ​​the Under Armor product. This is bad, especially when you are trying to sell a high end product.

In 2016, NBA superstar Stephen Curry expressed his displeasure that his signature sneaker, the Curry 2, was showing up at discount retailers. Supposed demand had been overestimated – and the product suffered.

The $ 285 billion track and field market has proven to be incredibly lucrative for Lululemon, Nike and Adidas over the past five years. Unfortunately for Under Armor, the decision to stay away from the athleisure wave and instead deploy capital to fitness technology and doubling down on performance clothing has proven to be a costly one.

Interestingly, there was still no plan to increase athleisure exposure in the company’s five-year turnaround plan. The company has remained steadfast in its claim that performance gear is the bread and butter of the business. Either way, it’s probably too late to follow the trend.

The direct investments of the company were also unsuccessful. Under Armor has invested nearly $ 1 billion in connected fitness and digital health and wellness. At first glance, it looks like an incredibly premonitory decision. The connected fitness space has been one of the most popular for investors over the past 18 months – think Peloton, Tonal, Tempo, Hydrow, etc.

Under Armor, however, appears to have been directionally correct but tactically ineffective.

  • Endomondo purchase: $ 85 million
  • MyFitnessPal purchase: $ 475 million
  • MyFitnessPal Exit: $ 345 million

After several years of letting these platforms languish without real product development or additional offers, the business has simply lost all its meaning.

Looking forward

There is hope! Last week’s earnings call shows signs that the issues are being resolved.

The company said stocks were down 21%. Revenues increased, DTC revenues increased, and although e-commerce is (slightly) declining, there has been a concerted effort to shift the distribution strategy towards a more balanced approach between physical sales and online sales. line.

The company is also reducing its losses on the sponsorship side. According to the Baltimore Business Journal, the company has lost 47% of its sponsorship contracts compared to 2019. UCLA, UC Berkeley and the University of Cincinnati are just a portion of the team sponsorships that Under Armor dropped over the past three years in an effort to reduce costs and save money. eliminate business inefficiencies. This reallocation of capital, along with the restructuring of the company, generated significant cost savings for the company – an overall victory for the balance sheet.

What remains to be seen, however, is whether Under Armor’s judgment has improved from an innovation and strategy perspective. The lack of athleisure and the inability to capitalize on connected fitness is a concern.

As the company continues to build on its improved operational know-how, it will be important to track exactly what it is getting into on the innovation side. Personally, I’m keeping my eyes peeled for Under Amour’s next big M&A deal.

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