Business Overview and History
Under Armour Inc (UAA) is a leading developer, marketer, and distributor of branded performance apparel, footwear, and accessories. Founded in 1996 by Kevin Plank, the company has grown to become one of the most recognized athletic brands in the world, with a focus on engineering innovative products that help athletes perform better.
Under Armour was established in 1996 when founder Kevin Plank, a former University of Maryland football player, created a moisture-wicking t-shirt to address the shortcomings of traditional cotton athletic wear. Recognizing the growing demand for high-performance sportswear, Plank launched the company out of his grandmother's basement, quickly gaining traction with athletes and consumers alike.
In its early years, Under Armour focused on developing innovative moisture-wicking fabrics and building brand awareness among athletes, particularly in the collegiate and professional sports markets. The company's products gained popularity among athletes and coaches, leading to rapid growth and expansion.
Under Armour went public in 2005, raising over $150 million in its initial public offering. This influx of capital helped fuel the company's expansion into new product categories and markets. Over the next decade, Under Armour diversified its product line beyond apparel to include footwear, accessories, and equipment. The company also opened its first retail stores, known as "Brand Houses," and invested heavily in marketing and sponsorships of high-profile athletes and teams.
By 2015, Under Armour had surpassed $3 billion in annual revenue and was challenging industry giants like Nike and Adidas. However, the company soon faced several challenges, including inventory management issues that led to margin pressures and a slowdown in growth. Under Armour also encountered increased competition in the athleisure and sportswear markets.
In 2017, the company disclosed that it was under investigation by the U.S. Department of Justice and the U.S. Securities and Exchange Commission, which led to additional legal and regulatory challenges. Despite these setbacks, Under Armour remained a prominent brand in the athletic apparel and footwear industry, continuing to invest in product innovation, expand its global reach, and strengthen its direct-to-consumer channels.
Financial Performance and Outlook
For the fiscal year ended March 31, 2024, Under Armour reported revenue of $5.70 billion, a decrease of 3.4% compared to the prior year. Net income for the same period was $232.04 million, with diluted earnings per share of $0.52. The company's operating cash flow and free cash flow for the year were $353.97 million and $203.64 million, respectively.
In the first quarter of fiscal 2025, which ended on June 30, 2024, Under Armour reported a 10.1% decrease in revenue to $1.18 billion, with a net loss of $305.43 million and a diluted loss per share of $0.70. This performance was primarily driven by softer demand in the North American market, as well as the company's strategic efforts to reduce promotional activity in its direct-to-consumer channel. However, it's worth noting that the company exceeded its own outlook for the quarter.
Breaking down the first quarter performance by segment:
- Apparel: Net revenues of $757.79 million, representing 64.2% of total net revenues, down 8.1% year-over-year. - Footwear: Net revenues of $310.39 million, or 26.3% of total net revenues, down 14.7% year-over-year. - Accessories: Net revenues of $92.55 million, or 7.8% of total net revenues, down 5.4% year-over-year. - License Revenues: $21.67 million, or 1.8% of total net revenues, down 13.6% year-over-year. - Corporate and Other: Net revenues of $1.27 million, down 77.9% year-over-year.
Geographically, the performance varied:
- North America revenue: $709.26 million, down 14.2% year-over-year - EMEA revenue: $226.89 million, up 0.1% year-over-year - Asia-Pacific revenue: $181.84 million, down 10.1% year-over-year - Latin America revenue: $64.41 million, up 15.6% year-over-year
Despite the challenges in the first quarter, Under Armour has provided a full-year fiscal 2025 outlook that calls for a low double-digit percentage decline in revenue, with a 75 to 100 basis point improvement in gross margin. The company expects adjusted operating income to reach $140 million to $160 million and adjusted diluted earnings per share of $0.19 to $0.22.
For the second quarter of fiscal 2025, Under Armour expects revenue to be down approximately 12% compared to the prior year, with gross margin anticipated to be up 20-30 basis points. Adjusted SG&A is expected to decline at a high single-digit rate, and adjusted operating income is projected to be $110-$120 million, with adjusted diluted EPS expected to be $0.18-$0.20.
In terms of regional outlook, Under Armour expects North America revenue to decline 14-16% for the full fiscal year, which is a modest improvement from their prior outlook. However, this is expected to be offset by increased market pressures in APAC. International revenue is expected to decline at a low single-digit percentage rate, with EMEA expected to be flat and APAC expected to decline at a high single-digit percentage rate.
The company's financial position remains solid, with $884.55 million in cash on hand as of June 30, 2024, and a $1.1 billion revolving credit facility with no amounts outstanding. Under Armour's debt-to-equity ratio stands at 0.70, with a current ratio of 2.24 and a quick ratio of 1.35, indicating a healthy liquidity position.
Redefining the Brand and Executing the "Protect This House" Strategy
Under the leadership of CEO Kevin Plank, Under Armour is in the midst of a strategic turnaround, focused on redefining its brand positioning and executing its "Protect This House" strategy. This multi-faceted approach aims to address the company's past challenges and position it for long-term sustainable growth.
A key component of the strategy is the refocus on Under Armour's core as a "sports house" brand. Plank has emphasized the company's authenticity and credibility in the sports industry, positioning it as one of the few global brands that can truly claim the title of a "sports house." This strategic positioning is designed to differentiate Under Armour from competitors and reinforce its connection with athletes and consumers who value the brand's performance heritage.
To support this brand repositioning, Under Armour has made several key leadership changes, including the appointment of industry veteran Eric Liedtke as the company's new Executive Vice President of Brand Strategy. Liedtke's extensive experience in transformational brand growth and strategy is expected to be a valuable asset as Under Armour works to strengthen its marketing, consumer insights, and overall brand positioning.
Additionally, the company is focused on improving its product offerings, with a renewed emphasis on innovation, design, and category management. Under Armour has implemented a 9-month go-to-market process to complement its 18-month product calendar, allowing for a more agile and responsive approach to meeting consumer demands. The company has also committed to a 25% reduction in its SKU/style count, streamlining its portfolio to focus on its core sports categories and premium product offerings.
Another key pillar of the "Protect This House" strategy is the optimization of Under Armour's business operations. This includes efforts to reduce complexity, improve supply chain efficiency, and enhance the company's digital capabilities. The recent restructuring program has enabled Under Armour to streamline its workforce and execute various transformational initiatives, with the goal of driving long-term operational improvements and cost savings.
Elevating the Consumer Experience
Recognizing the importance of delivering a compelling consumer experience, Under Armour is also focused on strengthening its direct-to-consumer (DTC) and wholesale channels. In its DTC business, the company is working to evolve its North American e-commerce platform towards a more premium positioning, reducing promotional activity and driving higher average order values.
In its physical retail footprint, Under Armour is testing a new full-price Brand House concept, which features a more curated product assortment and enhanced in-store presentation. The company is also optimizing its Factory House outlet business, exploring ways to improve profitability and better leverage this channel to support its broader brand strategy.
On the wholesale side, Under Armour is committed to strengthening its relationships with key global retail partners. This includes improving product segmentation, enhancing integrated planning, and exploring joint marketing opportunities to drive deeper brand engagement and consideration.
The company's loyalty program, UA Rewards, has also been a positive contributor to its DTC growth and brand affinity. With nearly 5 million members in North America and higher revenue per consumer compared to non-members, the loyalty program is helping to expand Under Armour's reach and drive increased customer engagement.
Risks and Challenges
While Under Armour's strategic initiatives show promise, the company continues to face various risks and challenges that could impact its turnaround efforts. These include:
1. Intense competition in the athletic apparel and footwear industry, with established players like Nike and adidas, as well as emerging brands, vying for market share.
2. Changing consumer preferences and the need to accurately anticipate and respond to shifting trends in the rapidly evolving sportswear market.
3. Macroeconomic headwinds, such as inflationary pressures and global supply chain disruptions, which could affect product costs and consumer demand.
4. Ongoing inventory management challenges and the need to strike the right balance between product assortment, promotional activity, and full-price sales.
5. Potential brand perception issues and the need to rebuild trust and loyalty among consumers, particularly in the North American market.
6. The ability to effectively execute its strategic initiatives and deliver on the expected operational and financial improvements within the planned timelines.
7. Legal and regulatory challenges, as evidenced by the recent $434 million settlement to resolve the "In re Under Armour Securities Litigation" case, which alleged that the company made false and misleading statements regarding its performance and future prospects, as well as undisclosed and improper sales and accounting practices.
Industry Trends and Market Position
The sporting goods and apparel industry has seen a compound annual growth rate (CAGR) of around 5-7% over the past 5 years, driven by increasing health and wellness trends globally. Under Armour's position within this growing market remains significant, despite recent challenges.
The company's focus on performance apparel, footwear, and accessories aligns well with the industry's growth trajectory. However, Under Armour must navigate the evolving landscape of consumer preferences, which includes a growing demand for athleisure wear and sustainable products.
Under Armour's efforts to reposition itself as a premium "sports house" brand could help differentiate it in a crowded market. The company's emphasis on innovation and performance-driven products continues to resonate with athletes and fitness enthusiasts, providing a solid foundation for future growth.
Conclusion
Under Armour's journey to redefine itself as a premium "sports house" brand presents both opportunities and challenges. The company's renewed focus on innovation, design, and brand positioning, coupled with its efforts to streamline operations and enhance the consumer experience, suggest that it is taking the necessary steps to regain its competitive edge.
However, the road ahead is not without its hurdles, as Under Armour must navigate intense industry competition, macroeconomic pressures, and the ongoing task of rebuilding its brand reputation. The success of its "Protect This House" strategy will ultimately depend on the company's ability to execute its plan with precision and agility, while captivating consumers with its performance-driven product offerings and storytelling.
The company's financial outlook for fiscal 2025, while showing some signs of improvement, still reflects the challenges ahead. The projected low double-digit percentage decline in revenue underscores the need for Under Armour to successfully implement its turnaround strategy and regain market share, particularly in North America.
As Under Armour continues to evolve, investors and industry observers will closely monitor the company's progress in reestablishing itself as a leading global sports brand. The company's ability to navigate these challenges, deliver on its long-term growth and profitability targets, and leverage its strong brand heritage will be crucial in determining its future trajectory in the competitive sportswear market.