How Successful Endorsement Deals Can Propel Under Armour To Great Heights

Under Armour (NYSE:UA), a developer and distributor of sportswear, has been on a hot streak for the past few years. The company has been posting consecutive quarters of top line growth on the basis of its fast-growing performance apparel business. In fact, the retailer has now posted 20 consecutive quarters of above 20% overall top line growth, with 22 consecutive quarters of 20% growth in the apparel segment. On the agenda now for the retailer is growing its international business, women’s business, and footwear segment.

At the base, the business of sports retailing is very simple: it involves the design of a product, setting up a distribution channel for the product, and using endorsements from sports stars and celebrities to sell the product. Almost all successful companies in the market have followed this business model, including giants Nike and Adidas. Although there are subtle differences in product design and quality between companies, the main differentiating factor between these companies is the appeal they have for their customers, which is mostly a function of the quality of advertising and popularity of the endorsements they use. Consequently, this is where companies focus their budgets and energies. Last year, Under Armour tried getting NBA star Kevin Durant to sign up as an endorser for the company’s footwear products, but was pipped to the post by Nike. Durant could have helped the company’s footwear business to grow by 50%, and this is why the company was willing to spend as much as 10% of its marketing budget on paying Durant alone. However, the company failed and it will have to try harder in the future to get up and coming super stars to sign on with the brand if it is to compete in the highly lucrative footwear market.

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-eighth  (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%.

In our forecast, we have projected the company’s footwear line to grow at a rate in the mid-30’s. However, if the company can convince high performing athletes to endorse its brand, it can post a higher rate than that. One example of this is the effect current endorser Stephen Curry’s strong performances in 2015 have had on sales of the CurryOne line of shoes released by Under Armour. 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 shoe market compared to Nike’s 96%, will not gain much in terms of top and bottom line from Curry’s success, but will definitely add to its growth story. If Curry goes on to win the MVP and sells as many as 1 million units, the company will make $120 million in sales, implying an increase of nearly 33% to the footwear segment’s revenues from a single line of shoes alone. Therefore, if the company can pull off similar deals in the future and post an average growth of 50% year-on-year, which is highly possible given the low base the segment is starting from, $430 million in 2014 would theoretically grow to close to $6 billion by the end of our forecast period. This can have an impact of around 15% to the company’s stock price alone.

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