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UAA UA The Recent Results: The Main Fundamental Issues Are Still Evident

Under Armour's latest quarterly results showed continued fundamental issues, with revenue growth moderating and North American sales declining sharply by 12.1%. While external factors have played a role, Under Armour's deep issues with its brand and proposition are demonstrated by its marked underperformance compared to competitors. The report analyzes four reasons for Under Armour's fall from grace: shallow customer loyalty, a confused brand focus as it has expanded, mistakes in distribution strategy, and failure to effectively connect with women shoppers. Reinventing and reinvigorating the brand will require significant financial discipline and exertion.

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26 views

UAA UA The Recent Results: The Main Fundamental Issues Are Still Evident

Under Armour's latest quarterly results showed continued fundamental issues, with revenue growth moderating and North American sales declining sharply by 12.1%. While external factors have played a role, Under Armour's deep issues with its brand and proposition are demonstrated by its marked underperformance compared to competitors. The report analyzes four reasons for Under Armour's fall from grace: shallow customer loyalty, a confused brand focus as it has expanded, mistakes in distribution strategy, and failure to effectively connect with women shoppers. Reinventing and reinvigorating the brand will require significant financial discipline and exertion.

Uploaded by

srikar
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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The Main Fundamental Issues Are Still Evident

Under Armour (UAA) (NYSE:UA) has faced fundamental issues on several fronts for a while,
and the recent results didn’t show any improvements on those fronts. The management is
proud of some improvements achieved recently, but the reality is that the main fundamental
problems seem to be as evident as before.
Global revenue was up 6.1%, driven by a 17% increase in the direct consumer business and a
27% increase in the international business. Although it indicated a slight acceleration from the
4.6% growth delivered in Q4 2017, we have to consider that results were helped by easier
comparisons with Q1 2017, when sales were already showing some weakness and grew only
6.6% compared to the previous year. On a 2-year stacked basis, we can actually say the growth
rate has declined, which may indicate a further deterioration in the underlying trend.
There were several sources of disappointment. The first is the poor performance in North
America, where sales were basically flat despite the improved consumer spending
environment. The better conditions of the retail industry, including better levels of foot traffic,
lower promotions and a higher willingness to spend on apparel and shoes from customers,
don’t seem to be helping Under Armour. The brand has lost the traction it had in the past few
years and doesn’t seem to be able to trigger growth again. The recent weakness is just a further
confirmation of how temporary phenomena such as the success of Stephen Curry have had on
Under Armour’s performance, boosting sales in the short term.

The question arising from the latest set of results is: how did the one-time powerhouse of
sports retail lose so much traction so quickly?

With revenue grow moderating for the past couple of quarters, and with North American
sales down across the first half of the year, the signs of a slowdown have been present for
some time. Given the gentleness of these previous shifts, it has been easy to pin the blame on
external factors such as a tapering down of demand for athleisure apparel, or the bankruptcy
of leading sports retailers.

The third quarter numbers represent a marked deterioration from those previously modest
declines. Overall revenues tumbled by 4.5%, while North American sales plummeted by a
painful 12.1%. In our view, this is now about more than external factors — it demonstrates
issues with the brand and its proposition. Especially so since other brands and retailers,
including Lululemon, have not posted such calamitous figures.
Before diving into the detail of Under Armour’s travails, it is only fair to note that this is not
the easiest of trading environments. Our consumer data show a marked slowdown in interest
in sporting and athleisure apparel, and this is having an impact on sales across the sector. A
rash of discounting at many retailers has also put pressure on revenues and margins.

All that said, demand in the United States has not fallen by anywhere near 12% over the past
three months, so it is clear that Under Armour is underperforming and losing market share.
This is an abrupt about-turn for a company that, until recently, was on a mission to challenge
the might of Nike and other major brands. In our view, there are several reasons for this fall
from grace.

The first of these is that Under Armour has put down very shallow roots. While awareness has
soared over recent years and customer numbers have risen, loyalty to the brand is not deep-
rooted in the same way that it is at Lululemon and Nike. What this means is that as demand
moderated, Under Armour has been quick to drop off the radar of many consumers.

The second reason relates to Under Armour’s focus. Lululemon has a unifying purpose to its
brand; the same can be said of Nike, even though its reach across sports retail is far more
varied. As it has expanded, Under Armour appears to have lost some of its brand essence, and
its proposition and purpose have become confused. Admittedly, communication in its own
stores and online is better, but in third-party shops the focus is completely lost and, in some
instances, Under Armour has become just another brand in a sea of brands.

The third reason relates to distribution. Here, we see the decision to go heavily into stores
such as Kohl’s as a mistake. Although we applaud Under Armour’s attempts to widen its
reach, we believe it should have expanded more selectively. Failure to do so has alienated
other, more important, retail partners and has also devalued its brand in the eyes of some
consumers.

The fourth reason is the failure to connect with women. As much as Under Armour has tried
to increase its appeal to female shoppers, its brand is very masculine and has limited appeal
— especially outside of the professional sports market. This can be remedied, but Under
Armour needs to have a serious rethink about its marketing, store design, and product mix for
female shoppers.

This unfortunate state of affairs has hit Under Armour at a time when it remains in expansion
mode. As much as this may be prudent overseas — where the company is still growing – the
failures in its home market have hit the bottom line hard. The 57.7% decline in net income is
unfortunate and suggests a lot more financial discipline is needed in the quarters ahead — an
uncomfortable juxtaposition with the need to reinvent and reinvigorate the brand.

Under Armour is not so broken that it cannot be fixed. But the days of glory, when it would
post double-digit uplifts in sales, are over. Now is the time to work out, slim down, and
become more competitive. Ultimately, that means quite a lot of exertion and financial pain in
the quarters ahead.

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