Under Armour Banking On Kevin Durant’s Star Power To Grow Its Footwear Sales

Under Armour (NYSE:UA), a developer and distributor of athletic apparel, footwear and accessories, has posted 17 consecutive quarters of over 20% increase in its top line. In the period, the company has managed to triple its revenues. The company has also announced a revenue target of $4 billion by fiscal 2016, nearly two times its fiscal 2013 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.

Earlier this year, when it launched a new running shoe, Speedform Apollo, Under Armour finally seemed to have a product that can help it make a dent in the footwear market. The company leveraged 18 years of expertise in the apparel market to apply the fitting technology of a compression top to shoe-making. The response to the shoe was unanimously positive with Competitor magazine rating it as the Best New Product in Spring 2014 and Runners World rating it as the Best New Launched Product for the month of March 2014. Moreover, owing to the sales of SpeedForm, footwear revenues were up by 41% compared to the same period in the previous fiscal year. ^[2] Knowing that the two leading sportswear retailers, Nike and Adidas, generate more of their revenues from footwear than apparel, Under Armour has stated its aim of becoming one of the top three footwear companies in the market. ^[3] In our analysis, we look at the opportunities and challenges the company will face as it tries to capture more of the sports footwear market.

See our full analysis for Under Armour

The Fight for Market Share

Under Armour is a relative newcomer in the footwear market. Even in the U.S., from where the company earns nearly 90% of its revenues, the Under Armour brand only has a 2.5% share of the market. ^[4] Compared to this, Nike has nearly 25% of the global sports footwear market and 60% of the U.S. sports footwear market including the Jordan and Converse brands. The overall global sports footwear market is only expected to grow at a CAGR of 1.5%, to reach $87 billion from the current $78 billion by 2020. This makes the task of gaining market share in the footwear space more challenge than it already is.

If Under Armour is to increase its market share, it will have to grow at a faster rate than the overall market, which means that it will have to attract customers away from competitors like Nike, Adidas, Puma, Skechers, Asics and Wolverine. This fight for market share is going to first materialize in the stores of footwear retailers like Foot Locker. These retailers only offer limited floor space to companies and that limits the number of shoes they can sell. One reason for Under Armour’s low market share is simply the limited number of volumes it sells compared to Nike. Currently, Under Armour is only banking on its running category, which it can up-sell by leveraging its recently acquired fitness technology, MapMyFitness. But in the future, it will have to expand to other categories, like training, baseball and soccer, which will be key for international growth. Comparatively, Nike offers running, basketball, baseball, soccer, training and casual shoes, in addition to slippers and children’s footwear, and it is an influential name in each of these categories. It is possible for Under Armour to channel Nike in terms of market presence, but it first must find people willing to sell all these shoes. For that it will have to take away floor space in these retail chains from competitors, which can only be triggered by the exceptional performance of the Under Armour shoes at these stores. ^[5]

One way Under Armour appears to be doing this is by signing an endorsement deal with NBA superstar Kevin Durant. Under Armour, which has less than 1% market share of the basketball shoes market compared to Nike’s 96%, is banking on Durant’s star status to attract customers to the brand. ^[6] The company offered Durant a shoe deal of between $265 million and $285 million over 10 years. ^[7] The company is taking a huge risk by paying the basketball star a huge raise over his previous $70 million over 7-year deal with Nike. ^[8] In return, UA hopes that some of Durant’s celestial status will rub off on the brand and help elevate its basketball shoe sales. Durant’s Nike signature shoe sales jumped 400% last year from $35 million in 2012 to $175 million in 2013. Even if Durant can help UA bring in an additional $200 million in revenues through his shoe sales, the company will grow its footwear revenues by nearly 50%. In the first six months of 2014, Under Armour’s footwear division generated $223 million in revenues, just shy of 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. ^[9]

Margin Pressure

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. Moreover, the addition of the Kevin Durant deal will increase the company’s marketing expenses. According to some estimates, the deal will increase the company’s total marketing spend by about 10%.

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, earning this influence will prove hard. ^[10]

For a company like Under Armour whose international business is loss making on an operating basis ^[1], 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. Under Armour 10-Q [↩] [↩]
2. Under Armour CEO: Big Strides In The Running Market, CNBC, January 2014 [↩]
3. Fast Growing Under Armour Gaining Speed In Global Market, Medill Reports, March 2014 [↩]
4. March 2014 Atheltic Footwear Executive Summary, FDRA, March 2014 [↩]
5. Under Armour CEO Takes Aim at Running Market to Fill Footwear Gap,Wall Street Journal, April 2014 [↩]
6. Under Armour Could Score An Unprecedented Victory Over Nike, Business Insider, August 2014 [↩]
7. LeBron And Durant Have The NBA’s Best-Selling Signature Sneakers, Forbes, February 2014 [↩]
8. Kevin Durant offered $265-285 million by Under Armour, SB Nation, August 2014 [↩]
9. Nike 10-K, SEC [↩]
10. Average Selling Price Of A Sneaker, Complex, November 2013 [↩]