What Under Armour’s New “Project Glory” Means For Its Valuation

Under Armour (NYSE:UA), a developer and distributor of athletic apparel, footwear, and accessories, has enjoyed an excellent spell over the last few years. The company has posted an increase of over 20% in top-line growth for 22 consecutive fiscal quarters. ((Under Armour 8K, Investor Relations)) This growth has been mostly been driven by the continued expansion of performance apparel sales. Hoever, in recent quarters, growing footwear sales have also started contributing. Meanwhile the company has been focusing on expanding both its international business and the range of products targeted at women.

But if we take a step back and analyze Under Armour’s business from the  fundamentals, we will see that the company isn’t doing anything extraordinary at the level of its business model. The sportswear business is basically a three step process: designing new products, manufacturing said products and selling them to customers through either the retail or wholesale channel. These companies usually rely on getting multi-million dollar endorsements from star athletes in order to gain access to their fans and sell them their products. Once a company reaches a certain level of market penetration, it is extremely difficult for it to differentiate itself from competitors in a meaningful way. Cosmetic differentiators such as different brand ambassadors, logos and marketing slogans, do little to carve out a new imaginative space within which the company exists for consumers to think of it in a way that they don’t about competitors. Therefore, in order to gain a competitive advantage a company must do something at a fundamental level in order to continue growing.

Manufacturing Process

In the earnings call of the previous quarter, Under Armour CEO Kevin Plank revealed that the company was trying its best to significantly change the way it manufactures its footwear products. Plank said that apparel and footwear manufacturing facilities have hardly modernized like other industries. The manufacturing process of a shoe involves upwards of 150 people from end to end. Companies so far have been able to increase their profitability without modernizing the manufacturing process because they have been able to save on labor costs as they shifted manufacturing to low cost centers in East Asia, South East Asia and Latin America. Under Armour’s own products are manufactured by 29 different manufacturing partners spread out in 14 different countries, most of which are in China, Vietnam and Indonesia.

The current manufacturing process involves a globalized supply chain in which raw materials are procured at one place and shipped to manufacturing facilities, which are provided with engineering and design expertise by the companies.  Finished goods are then sold at various locations in the world through retail and wholesale channels or directly to the consumer through the e-commerce channel. This process consumes a lot of time and limits the speed with which a product can be shipped to the market, in turn constraining length of product cycles. When you know that a new product will take a certain amount of time to be ready for the market, that fixes the inventory size of the previous product that you produce. Smaller cycle times can be leveraged by limiting the amount of time a product remains on sale, which can then be leverage to command higher prices, as customers visiting the stores know that it is unlikely that they find the product there on the next visit. This is the strategy Lululemon has used to command an extremely high retail revenue per square foot over the past few years.

Project Glory

Consequently, Kevin Plank and his team are renewing focus on what they call “local for local” manufacturing. ^[1] As noted, the company has already attempted to improve its manufacturing process for footwear.  Plank says that they have reduced the number of human touches it takes to manufacture a shoe from 150 by around 30%.  The company’s biggest push in this direction is coming with its new manufacturing facility in Baltimore, a hub for innovation they call their Lighthouse or Project Glory. ^[2] The company is preparing to open a new facility in Baltimore in 2016. This 133,000 square foot site made on a renovated garage will be the hub of Under Armour’s Project Glory.

According to CEO Plank, this site will be an “advanced manufacturing innovation hub”, where the company will test out new technologies. Successful practices will then be commercialized and integrated into the company’s existing supply chain. The key goal of this project is to significantly alter the dynamics of its time to market, as well changing the price of products by lowering both manufacturing and labor costs. The company is hoping these advancements will help localize manufacturing and allow the company to produce products for each market locally. This project could have significant long term impact on the company’s valuation as it has the potential of changing Under Armour’s labor practices, shipping costs, tax structure and marketing campaigns.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Under Armour’s vision for future manufacturing: make local for local, Baltimore Sun, November 2015 [↩]
2. Under Armour’s (UA) CEO Kevin Plank on Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, October 2015 [↩]