What Is Under Armour Doing To Turn Its Business Around?
In the previous article, we began our discussion on Under Armour’s (NYSE:UA) “pivot” strategy, and explained in detail, the company’s push into international markets. Through the remainder of this article, we will elaborate on the two other growth strategies employed by the company at the moment – increased women’s offerings and expansion of its direct to consumer channel.
At the moment, the company’s stock is trading at around $17.77, slightly below our price estimate. We have created an interactive dashboard titled, Is The Market Pricing Under Armour Fairly, to best explain our reasoning behind it.
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Increase In Women’s Product Offerings
Most brands in the male-centric activewear space have largely ignored women when designing their products. In general, most sportswear manufacturers tend to design apparel for men, which are then made in smaller sizes with brighter colors to attract female customers. Incidentally, it is this vacuum that enabled Lululemon to take the women’s athleisure market by storm.
Under Armour, like its competitors Nike and Adidas, has been called out on this issue many times over the years. However, the company now sees heavy potential in a market that is largely untapped. Given that women account for roughly 50% of the world’s population, it only makes sense that apparel companies should cater to their needs as much as they cater to men. Under Armour has decided to change things around in this respect.
Over the past few quarters, through active marketing and introductions to newer markets, the company’s women’s business has seen significant jumps in its business crossing over $1 billion in sales recently. Further, rather than concentrating only on apparel, as they had done previously, the company has decided to take a more head to toe approach with special emphasis on sports bras and bottoms. Given that 2018 is a hybrid year of sorts in this space, we hope to gain a lot more clarity on the success of this move in the coming months.
Improving Revenues From Its Direct To Consumer Channel
Since the beginning, Under Armour’s business model had relied heavily on its wholesale channels to help propagate and market themselves. However, over the last few quarters, this model has come to hurt the company significantly. With a rise in online shopping, big retailers are finding it hard to maintain traffic in their brick-and-mortar stores. Consequently, many big major retailers like Sport’s Authority filed for bankruptcy, while cutting the number of stores it operates by more than half.
Online retail sales in the U.S. have grown at a rapid pace over the past several years, thanks to growing internet usage in the country. Internet penetration in the U.S. has gone up from 44% in 2000 to about 88.5% currently. The ease and convenience of buying goods from the comfort of your home, and having them delivered to your doorstep, is a luxury that many can now afford. Hence, it comes as no surprise that online apparel sales in the U.S. are expected to cross over $100 billion by as early as 2019.
Like its competitors, Under Armour has come to realize the importance of opening and maintaining an easy-to-use and accessible online marketplace. Additionally, the company is working heavily on improving its mobile shopping experience. In this respect, it introduced a new UA Shop App which allows the customers to navigate through its full range of products from their mobile phones. Apart from being a marketplace, the app will collect data on the customer’s activity on the app to effectively refine results and recommend products.
In the most recent quarter, direct to consumer revenue grew by about 7% to hit $414 million, as the revenue channel represented nearly 35% of total global sales in the quarter. We expect a similar momentum to persist in the near term.
While these strategies have definitely seen some success in the recent past, they have taken a heavy toll on profitability. This is evident in the sharp rise in SG&A expenses in the past few quarters, rising by almost 10% in the latest quarter. In the next installment of this series, we will delve further into how these strategies are affecting operations at the company.
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