Under Armour Through The Lens Of Porter’s Five Forces

Under Armour (NYSE:UA), a developer and distributor of athletic apparel, footwear and accessories, has seen its stock rise by more than 20% since the last three months. The company has shown impressive performance over the past few years with its top-line growing by more than 20% over the last 12 quarters. Its growth continues to be fueled by its expansion in footwear, women’s, international and direct-to-consumer business. While the company’s growth story remains intact, we look at how Under Armour stacks up along Porter’s Five Forces to understand where it can gain or lose going forward.

According to our analysis a competitive rivalry within the industry, bargaining power of customers and threat of new entrants are the three key forces which have potential to disrupt Under Armour’s growth story. The company relies on Dick’s Sporting Goods and The Sports Authority for more than 20% of its revenues and hence problems at these retailers could affect its growth pace. While Under Armour faces stiff competition from Adidas and Nike, it could also see the competition go up from other companies as it does not hold process or fabric patents.

See our full analysis for Under Armour

Porter Five Force Analysis

Competitive Rivalry Within The Industry – Nike, Adidas pose threat and Under Amour does not hold patents

• Under Armour faces intense competition from the likes of Nike and Adidas as well as newer players.
• Nike and Adidas, which have considerably larger resources at their disposal, are making a play within the performance apparel market to gain market share in this upcoming product category.
• These larger companies could leverage their strong brand recognition and marketing efforts to enhance their presence in international markets (outside North America) where Under Armour has a limited presence. UA derives only 6% of its revenues from the international markets.
• Private label offerings of retailers also pose a threat to Under Armour.
• Under Armour does not hold any fabric or process patents, and hence its product portfolio could be copied in the future.

Bargaining Power Of Suppliers –  Diverse supplier base limits their bargaining power

• In 2012, Under Armour’s products were produced by 27 manufacturers located across 14 countries, of these top 10 accounted for 49% of the products manufactured.
• Asia accounted for the largest proportion of products manufactured with 53% share followed by Central and South America (19%), Middle East (18%) and Mexico (8%).
• On account of a diverse base of suppliers, we expect their bargaining power to be limited.
• However, suppliers generally share the increased costs of raw material and labor with Under Armour typically through pricing so this is an area to watch.

Bargaining Power Of Customers – Wholesale customers such as Dick’s Sporting Goods and The Sports Authority hold leverage

• Under Armour’s customers include both wholesale customers as well as end-customers. Wholesale and direct-to-consumer channel accounted for 69% and 29% of Under Armour’s total net revenue respectively in 2012.
• Dick’s Sporting Goods and The Sports Authority comprised for 22% of Under Armour’s net revenue in 2012; with one of these customers responsible for at least 10% of net revenue in 2012.
• Wholesale customers hold certain degree of bargaining leverage as they could substitute UA’s products with other competitors’ products or private label offerings to gain higher margins.
• Bargaining power of end customers is lower as Under Armour enjoys strong brand recognition among them on account of innovative product portfolio and high quality products.
• However, customers could also gravitate towards other brands on account of factors such as price, advertising, product sponsorship, and changing styles.

Threat Of New Entrants – Existing sports apparel companies could enter the performance apparel market

• Large capital costs are required for branding, advertising and creating product demand, and hence this limits the entry of newer players in the sports apparel market.
• However, existing companies in the sports apparel industry could enter the performance apparel market in the future. Under Armour does not hold patents over its products and hence this factor poses a threat.

Threat Of Substitute Products – Demand for Under Armour’s products is expected to continue

• The demand for performance apparel, sports footwear and accessories is expected to continue, and hence we think this force does not threaten Under Armour in the foreseeable future.

Our $53.50 price estimate for Under Armour’s stock, represents around 10% downside to the current market price.