How Stephen Curry’s Amazing Season Can Add To Under Armour’s Growth Story

Under Armour (NYSE:UA), a developer and distributor of athletic apparel, footwear, and accessories, enjoyed an excellent 2014. But the one dark spot amid a fantastic year was its failure to land an endorsement deal with Kevin Durant. The company offered Durant a huge deal that would have earned him something between $265 million and $285 million over 10 years. ^[1] The company wanted to give the basketball star a huge raise over his previous $70 million over 7-year deal with Nike. ^[2] In return, UA hoped that some of Durant’s celestial status would rub off on the brand and help elevate its basketball shoe sales. Durant’s Nike signature shoe sales jumped 400% year-on-year from $35 million in 2012 to $175 million in 2013. Durant eventually ended up signing a 10-year $300 million deal with Nike, which is a shame for Under Armour because if Durant could have helped UA bring in an additional $200 million in revenues through his shoe sales, the company would have grown its footwear revenues by nearly 50%. In the 2014, Under Armour’s footwear division generated $431 million in revenues, a 44% jump from its $239 million revenues for the fiscal year 2013. A huge increase, but still only a pittance compared to Nike’s footwear revenues of $16 billion in fiscal 2014. ^[3]

Enter Stephen Curry

The U.S. basketball shoe category is dominated by Nike with its lineup of Jordan, Lebron and Kevin Durant signature shoes. Under Armour only had a minor play in the segment with a signature line for Stephen Curry. However, the excellent performances from Curry have made him a leading candidate for the NBA MVP for the year and simultaneously propelled the sales of Curry’s signature shoes. A recent Citigroup survey showed that the CurryOne, which was released during the NBA All-Star weekend, is one of the most hotly anticipated shoes for the year. ^[4] In fact, according to the survey, only one other shoe, Nike’s Lebron, generated more excitement among consumers. The CurryOne has been available from Under Armour since mid-February for $120. Under Armour, which has less than 1% market share of the basketball shoes market compared to Nike’s 96%, will not gain much in terms of top and bottom line from Curry’s success but it will definitely add to its growth story. Even if Curry goes on to win the MVP and sells as many as 1 million units, the company will make $120 million in sales, a small addition compared to the annual guidance of around $3.7 billion for the full year.

Importance of Footwear

The key difference between Nike and Under Armour is that the former was initially a basketball shoe company that branched out into other areas, while the latter is still primarily a seller of textile apparel trying to grow its footwear business. Nike generates roughly 60% of its sales from footwear, while Under Armour makes around one-eight (or 12.5%) of its revenues from footwear. To give a sense of proportion, Nike makes more money through footwear sales in China alone than Under Armour from all of its footwear business operations. However, there is an enormous opportunity for Under Armour to grow in this space. Nike has a monopoly in footwear in the U.S. market with roughly 60% market share if you include sales of Converse and Jordan and 96% market share in the basketball segment, the biggest segment in the footwear space. If Under Armour can increase its market share to even 10%, it would end up growing its footwear sales four-fold and overall revenues by 33%.

However, there is a caveat here. Another factor worth keeping in mind, as Under Armour sets out in pursuit of a higher share of the sports footwear market, is the pressure this will exert on the company’s gross margin. The global footwear market is only half the size of the global sports apparel market. Moreover, it is only expected to grow at 1/3rd the rate at which the apparel segment is expected to grow. Add to these the fact that gross margin in footwear is usually 30% lower than that in other sportswear categories.

On the face of it, it seems that Under Armour’s push in the sports footwear space is only necessary for the sake of brand consolidation — Under Armour will no longer be an apparel brand that also makes footwear, but an integrated footwear-apparel brand. It could also be that footwear exerts greater influence on the willingness of a prospective apparel buyer, than apparel does on the footwear buyer. But with the company’s plans of launching footwear products at an average price of $100, compared to the average selling price of $68 for apparel, earning this influence will prove hard. ^[5]

For a company like Under Armour whose international business is loss making on an operating basis ^[6], the facts suggest that it must approach this space with caution. It will have to gradually introduce new categories, consolidate its position in those categories and leverage the strength of the relationships built with customers in those categories, to expand its market footprint.

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1. LeBron And Durant Have The NBA’s Best-Selling Signature Sneakers, Forbes, February 2014 [↩]
2. Kevin Durant offered $265-285 million by Under Armour, SB Nation, August 2014 [↩]
3. Nike 10-K, SEC [↩]
4. Citigroup’s Annual Basketball Footwear Survey In 10 Charts, Yahoo Finance, March 2015 [↩]
5. Average Selling Price Of A Sneaker, Complex, November 2013 [↩]
6. Under Armour 10-Q [↩]