Under Armour Earnings Preview: Footwear and International Sales Growth In Focus

Under Armour (NYSE:UA), a developer and distributor of athletic apparel, footwear, and accessories, is set to report its second quarter earnings on July 23rd. In Q1 2015, Under Armour posted 25% net revenue growth to $805 million. ^[1] The company maintained its solid growth momentum as it achieved its 20th consecutive quarter of over 20% revenue growth. We believe the company will continue to show strong growth in the future as consumers continue to respond to the strength of its brand, and as the company’s efforts to lure in women customers are successful.

With the second quarter report, we expect to learn Under Armour’s growth story continues. That said, it is clear the focus is shifting to increasing international and footwear sales in the sales mix. Below, we discuss these factors in greater detail.

Massive Scope For Growth In Footwear and International Sales

While the U.S. performance apparel market remains the biggest revenue source for the company, footwear and international sales are slowly getting to the point where their importance cannot be understated by the company. In the first quarter, Footwear sales grew by 41% to $161 million, owing to strong growth in the running category, as well as the impact of brand ambassador Stephen Curry’s performance leading to higher sales of the signature CurryOne shoe. ^[2] The much publicized SpeedForm Gemini and Apollo running shoes showed excellent sell-through rates, while the $125 ClutchFitDrive baseball shoe also showed strong momentum. Footwear has now grown to represent 20% of the company’s net sales.

To get a better perspective on Under Armour’s growing position in the footwear market, we need to take a look at Nike. In terms of market share, Under Armour has barely made a dent in the athletic footwear market compared to Nike. The Oregon based Nike makes roughly 60% of its annual revenues through the footwear business and because of its notoriously sticky brand value, it can raise prices and still sell the same number of shoes. 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 market. Nike has a dominant position in the U.S. footwear market with roughly 60% market share, including sales of Converse and Jordan.  And it commands a near-monopoly 96% market share in the basketball segment, the biggest segment in the footwear market. 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%. Under Armour is nowhere near that point and its attempts to bring NBA superstars like Kevin Durant on board betray that the company is trying hard to change that state of affairs.

Similarly, growing the Under Armour business outside the U.S. is critical for the company’s near term growth prospects. In 2014, the company nearly doubled its internationals sales, but the overall revenue from international operations still came in below the $300 million mark. ^[2] Again in relation to Nike, which makes more than half of its revenue from international operations, Under Armour has much room to grow in this market.

Focus Shift

Until now Under Armour’s growth has mostly come from selling performance apparel to males in the United States through its own stores and through sports specialty retailers like Dick’s Sporting Goods. Going forward, the company will have to shift the emphasis somewhat towards other distribution channels and demographics. For example, the company aims to grow the women’s business to around $1 billion by 2016, and is taking several measures to accomplish this goal. It has expanded its creative talent within the women’s business and altered its product portfolio and retail presentation to suit the tastes of female customers. Additionally, in 2014, Under Armour’s direct-to-consumer revenues rose by 32%, outpacing the overall revenue growth at the company. The company has also focused on increasing square footage and its factory store count during the calendar year. We expect the company to continue to focus on its efforts in these spaces to drive revenue growth going forward.

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1. Under Armour 10-Q, SEC [↩]
2. Ref: 1 [↩] [↩]