Under Armour Looks To Tackle A Tough European Market

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Under Armour

After doing well in the U.S. sports apparel market, Under Armour (NYSE:UA) is looking to expand its international business in Europe. Unlike its much larger competitor Nike (NYSE:NKE), Under Armour’s presence is largely limited to the U.S., with international business accounting for only 6% of its annual revenues. [1] However, the retailer has recently decided to speed up its brand awareness campaign in Europe. It is looking to add more shop-in-shop locations in the sportswear market and also renovate its e-commerce channel. [2] With Europe strategy in mind, Under Armour signed a five-year deal with English football club, Tottenham Hotspur in 2011, and is the official kit supplier of Welsh Rugby Union since 2008. [3] [4]

Despite its efforts, Under Armour may find the European market a tough region, where established sports apparel and footwear retailer like Nike is also struggling to sustain growth due to weak economic environment. [5] Similarly, retailers such as Abercrombie & Fitch (NYSE:ANF) and Guess (NYSE:GES) are also struggling. [6] Considering these factors, we do not see upside to Under Armour’s stock in the near future from its efforts in Europe.

See our full analysis for Under Armour

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Sponsorships To Create Brand Awareness In Europe

To enhance its brand appeal among European sports fans, Under Armour has signed two important deals with popular sporting clubs in the past. In 2008, the retailer signed a deal with Welsh Rugby Union to supply full range of performance apparel and accessories to the team and its support staff. [4] In a similar deal in 2012, Under Armour became the official playing uniform supplier of English football club, Tottenham Hotspur. [3] It also supplies uniforms to a few other teams and has signed some players for individual endorsements.

Last year, Under Armour started an aggressive digital marketing campaign that included promotions on Facebook and Twitter. [7] The company’s management believed that Under Armour was at a point where it could leverage its brand strength to widen its customer base and not just rely on sales to popular teams. Under Armour wants to reduce its dependence on the sponsorship deals and use them as a platform for its brand awareness. [7] The retailer is also looking to increase the number of shop-in-shop locations in sportswear market to improve its visibility [2] as well as refurbishing its e-commerce site to improve the customers’ shopping experience and bolster its direct-to-consumer business. [2] [2]

These strategies will help Under Armour in raising brand awareness in Europe. Although the retailer is still far behind other brands such as Nike and Adidas, it does seems to be moving in the right direction. We believe that Under Armour has good growth potential given its innovative approach in performance apparel.

Why Is Europe Important?

For a sportswear brand, sponsorships for popular teams and athletes is an important marketing channels. Market leader Nike has done exceptionally well on this front and promoted its brand through major sports championships of 2012, such as the NFL Championship, the Olympics and Euro Cup. Nike launched its Flywire & Lunar lines of footwear in 2008 Beijing Olympics. These product lines are still very popular among athletes and generate around $2 billion in annual revenues. [8]

The popularity of soccer and the existence of several European leagues leagues such as La Liga, EPL, Bundesliga and Serie A, makes Europe an important international market for Under Armour. Considering the global fan following for most of these leagues, it gives Under Armour an opportunity to market its brand worldwide.

Weak Economy In Europe Poses A Problem

The weak economic environment in Europe has had its toll on retailers such as Nike, Abercrombie & Fitch and Guess, who are struggling to maintain their growth in the region. In Q2 fiscal 2013, Nike’s revenue growth from the Europe was significantly slower than its overall revenue growth. While the revenues form Europe reduced marginally by 1%, the overall revenues grew by 8%. [5]

Furthermore, Under Armour is a relatively new entrant in Europe and will face stiff competition from Nike. Nike’s presence in the region is strong, and the retailer sponsored eight of the 16 countries in participating in Euro 2012. We believe that Under Armour should leverage its innovative fabric such as Storm Cotton, Charged Cotton etc. to attract more sponsorship deals. This will positively impact its brand image among football fans, and ultimately result in higher sales.

We note that Under Armour’s international business only accounts for 6% of its annual revenues from Latin America, Europe, Middle East, Africa and Asia. [1] With its low revenue generation from these markets and tough expansion in Europe, we do not expect any significant upside to Under Armour’s stock in near term.

Our price estimate for Under Armour stands at $53, implying a premium of about 15% to the market price.

You can see our complete analysis for Under Armour here.

Notes:
  1. Under Armour’s SEC filings [] []
  2. Under Armour focuses brand strategy on retail stores, Marketing Week, Jan 9 2013 [] [] [] []
  3. Tottenham Hotspur Sign Kit Deal With Under Armour, BBC News, Mar 9 2011 [] []
  4. Under Armour inks deal to outfit Welsh Rugby Union, Business Journal, Feb 14 2008 [] []
  5. Nike’s SEC filings [] []
  6. Companies’ SEC filings []
  7. Under Armour readies ‘aggressive’, bid to take on Nike, Marketing Week, Jul 19 2012 [] []
  8. The Olympics – Investing In Sports, Jamaica Observer, July 4 2012 []