Under Armour’s Bid For International Growth

Under Armour (NYSE:UA), a developer and distributor of athletic apparel, footwear and accessories, has posted 16 consecutive quarters of over 20% growth  in its top line. Over this period, the company has managed to triple its revenues. What’s more, the company has announced a revenue target of $4 billion by fiscal 2016, nearly two times its current revenue of $2.33 billion, implying a compounded growth in excess of 20%. ^[1] So far, the company’s remarkable growth has been driven by its men’s synthetic performance apparel business, the backbone of the company’s business. However, for Under Armour to maintain its growth, which is harder given the much bigger revenue base now, it must strengthen its footwear, international and women’s wear businesses.

In a conference call for investors in January, Under Armour’s CEO, Kevin Plank, spoke of making UA a global brand, saying that “someday more than half of our revenues will come from outside of our home country”. He did not put a timeline on that goal, but elsewhere the company has stated that it wants to grow the contribution of its international revenues to 12% of the top line by 2016. ^[2] In fiscal 2013, international businesses only contributed around 6% of the top line, but by the first quarter of fiscal 2014, that figure has grown to 9.2% of the total revenues. This, despite, the net revenue figure having grown by ~36% in the same period. This growth, however, has come at a cost. On an operating basis, the company’s non-North American business is loss-making. In fact, the company’s losses have quadrupled from $1.2 million in 2013 to $4.3 million in 2014. (This amount is slightly overstated as some of the corporate service costs, included within North America in the 2013 period, have been allocated to other foreign countries and businesses in the 2014 period.) ^[1] Our analysis below takes a closer look at the likelihood of the company earning returns on their international investments in the long term. ^[3]

See our full analysis for Under Armour

Following In Nike’s Footsteps

Before entering the European soccer market, Nike (NYSE:NKE) was primarily a running and basketball shoe company from the United States of America. The European market was dominated by Adidas and Puma. Between them, they held 75% market share of Europe’s market. Moreover, they had strong relations with local soccer teams, grass root level soccer development associations and professional soccer teams with large fan bases. Nike strategically targeted key teams and players for sponsorships and then turned these sponsorships into larger ones, thereby deepening its relationships with national leagues. Now nearly two decades later, Nike is one of the most prominent names in the soccer business, sponsoring nearly 30 national teams and some of the most influential club teams in the world. Under Armour is using the same strategy that worked for Nike in Europe. Like Nike’s image as a running and basketball shoe company, Under Armour is presently only associated with American Football. But it is sealing prominent partnership agreements with organizations in other sports that align with its brand image, in a bid to influence aspirational consumers. However, its ability to influence these consumers is another matter. Under Armour, thus far, has only signed deals with teams like Tottenham Hotspur, only the 19th most popular soccer team worldwide.  This is much lower than 7th placed Liverpool ^[4], which is sponsored by Warrior (a company similar to UA) and the Welsh national rugby team. In order to gain access to large fan bases and influence consumer perception, it will have to enter into deals with teams that will get the brand more eyeballs. Moreover, these partnerships will have to be sufficiently successful so as to be leveraged into even bigger partnerships, which is a challenge given the rising competition in this space.

Increasing Awareness

Recently, the company attempted to expand its global presence by designing the outfits of several U.S. teams at the 2014 Winter Olympics in Sochi. The effort wasn’t entirely successful as several American speedskaters blamed their poor showing on defective suits. Despite this, Under Armour managed to grab an eight-year extension of its deal with the U.S. Speedskating team. The deal extends all the way through to the 2022 Olympics. The company will also outfit the U.S. gymnastics teams at the 2016 Summer Olympics in Rio de Janeiro and the 2020 Games in Tokyo. ^[5]

In Latin America, Under Armour has also targeted Mexico, Chile, and Brazil, which plays host to the 2014 World Cup and the 2016 Summer Olympics. In January the company’s direct to consumer business became operational in Mexico and it will do the same in Brazil and Chile later in the year. In Chile, it also signed a deal to become the official outfit sponsor of Chilean soccer giant, Colo Colo. ^[6] Late last year, Under Armour opened a brand new high concept store, called the “Experience Store” ^[7], in Shanghai, China. Under Armour sells its products directly to consumers through its 13 “brand house” stores in China ^[8], with the store count expected to quadruple by the end of this year. Given that Nike nearly generates 60% of its revenues from its international businesses, there is an enormous growth opportunity for UA. The extent to which it will manage to scale up its overall revenues will be highly influenced by how much of this opportunity it is able to grab in the long term.

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1. Under Armour 10-Q [↩] [↩]
2. Fast-growing Under Armour gaining speed in global market, Medill Reports, March 2014 [↩]
3. Under Armour’s CEO Discusses Q1 2014 Results, Seeking Alpha, April 2014 [↩]
4. World’s Most Popular Football Clubs, Bleacher Report, November 2013 [↩]
5. Under Armour, US Speedskating Extend Agreement, Washington Post, February 2014 [↩]
6. Under Armour Aims For Latin America, BizJournal, October 2013 [↩]
7. Under Armour China Experience [↩]
8. Under Armour Store Locator [↩]