Why Under Armour’s New NBA Deal Is So Important For The Company

Under Armour (NYSE:UA) has been on a hot streak for the last three to four years growing its top line by 20% year over year. The company has been growing its sales across all product categories. Performance apparel, its biggest business division, grew by 23% year over year in the second quarter of fiscal 2015, representing a 23rd consecutive quarter of over 20% growth. Footwear revenue grew by 40% on the back of strong sales of the CurryOne line of shoes and Accessories grew by 39%. Despite all this, the company is still a minor player in the athletic apparel and footwear market compared to Nike.

Throughout 2014-15, Nike and Under Armour went head-to-head in the NBA, pitting Lebron James against Stephen Curry as the Cleveland Cavaliers took on the Golden State Warriors in the NBA finals. The Warriors won the title and sales of the CurryOne, Under Armour’s signature line of shoes named after Stephen Curry and endorsed by him, expanded massively boosting the revenues of the company significantly. However, soon after Nike signed as the official apparel sponsor of the NBA in a $1 billion deal. ^[1]  Under Armour responded by signing a deal with the NBA to become the presenting partner of the NBA’s youth program, Jr. NBA, and the official title partner of the NBA Draft Combine starting in 2018. ^[2] This deal will make Under Armour the official outfitter of the Draft Combine and also allow the company to make a retail line of Draft Combine apparel for fans. Below, we talk about what this deal means for the company.

Nike Dominates Basketball

The main difference between Nike and Under Armour is that Nike was initially a basketball shoe company that branched out into other areas, while the latter is still primarily a seller of performance apparel trying to expand its footwear business. Nike generates around 60% of its sales from footwear, while Under Armour makes just over one-tenth (12.5%) of its revenues from footwear. In fact, Nike currently makes more money through footwear sales in China alone than Under Armour from all of its footwear operations.

However, there is a massive opportunity for Under Armour to grow in this market. Nike has a dominant position in footwear in the U.S. market with roughly 60% overall market share and 96% market share in the basketball segment — the biggest segment in the footwear space. Growth in this market depends upon endorsements. Athletic apparel design is a simple business with three steps — design, manufacture and distribution. It is very hard for companies to distinguish themselves at any of the three steps in the process, so companies have to rely on endorsements in order to differentiate themselves. Successfully done, this can boost sales significantly. 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. ^[3] 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%, not only gained a lot in top line and bottom line growth from Curry’s success, but also gained a lot in terms of brand appeal, folding Curry’s story into its own.

What Under Armour’s NBA Deal Means

Under Armour’s CEO has talked about his ambition of expanding basketball apparel and footwear sales beyond the $1 billion mark in annual revenue. While he hasn’t specified a time line by which he wants to achieve this, the two deals made by Under Armour hint that the company wants to get there sooner rather than later. Under Armour is also taking a number of other steps in order to get there. The CurryOne line of shoes was one such step and the company’s “Will To Win” campaign is another. The campaign which features athletes who overcome the odds to achieve their dreams is perfectly suited for the NBA Jr. and the Draft Combine, two places where the company is trying to market itself to rising stars. As the NBA plans to engage over 5 million youth players over the next 2 years through basketball clinics and youth tournaments, this is a good opportunity for the company which has so far only associated itself with lesser known stars who then went onto achieve national and international fame. Examples include Stephen Curry, Jordan Spieth and Misty Copeland.

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1. Nike Wins Deal to Outfit NBA, Wall Street Journal, June 2015 [↩]
2. Under Armour to become title partner for NBA Draft Combine, Reuters, August 2015 [↩]
3. Under Armour hit the jackpot with its Stephen Curry bet, Business Insider, June 2015 [↩]