Summary
Under Armour's success in the marketplace, acknowledged in their annual report, is a function of marketing. As management notes, some competitors are better positioned to outspend, out-market and out-advertise UA. A key ratio in the 2008 full year performance is SGA increasing as a percent of sales over 2007....and running at a very high rate already. In the event that UA finds sales or distribution lagging, it is unlikely that a siginficant increase in SG&A expense could be expected. And without that spending, sales will NOT organically increase.
Analysis
UA has accomplished a great deal. Against almost all predictions, the company has leveraged both a superior product AND an excellent brand positioning to establish a legitimate status in the athletic and performance apparel markets. Expansion from this base into fashion athletic apparel is both expected and would appear possible. However, that expansion is completely linked to the ability of the company to maintain the brand velocity established in 2006 and 2007.
A few quick ratios indicate that they have NOT been able to do this. SG&A declined from the catastrophicaly high levels in 2006 to an unhealthy but acceptable level in 2007, only to increase again in 2008. So while 2008 had a marked increase in net revenue, in effect, the company "bought" this increase through SG&A spend. At some point, stockholders and investors should look for the company to benefit from the economies of scale and distribution which make SG&A a leverageable expense category. In particular, celebrity endorsements, event sponsorships, and national advertising programs are relatively fixed cost expenses....as volume increases, these should contribute to reducing the SG&A percentage of sales. This did not happen in 2008, nor is it likely to happen in 2009.
The reality for 2009 is that it will probably require a HIGHER level of SG&A spend to generate volume increases (or even maintain volume) in the "needs based" consumer market we now experience. Across almost all sectors, the only competitors increasing share are those with INCREASED marketing spend. UA is NOT posititioned to execute this strategy, while at least two of it's major competitors are. 2009 will be a tough year for UA unless marketing creative results in a spike in brand awareness. Investing on the hope that marketing creative will counter industry, macroeconomic and specific economies is generally a bad idea.
