Under Armour Under Fire

Implications: How real are the issues that currently face Under Armour? The stock fell 24% on Friday as part of a perfect storm fueled by recession concerns, negative retail reports for the Holiday period, and a UA forecast termed disappointing by stock analysts, all converging at the same time. What impact will the upcoming UA Super Bowl advertisement and release of the cross training footwear line have on the brand in 2008? Can the brand achieve their projected long term growth rate of 20-25%? These are some of the key issues which help to answer the ultimate question: can Under Armour protect their house.

Analysis: There is a lot of angst in the investment community over the future performance of Under Armour, and with good reason.  The current retail woes are well documented, and the outlook for 2008 is not projected to show improvement.

Under Armour is counting on sustaining growth of it's apparel division in the US and abroad, but the other hope for the brand in the near future revolves around the introduction of a cross training line, which is their first foray into mainstream athletic footwear.

UA's initial footwear products have been more specialized and have met with mixed results.  The first year of the football cleat line was very successful, as the brand was able to turn an aggressive advertising campaign and it's "click-clack" slogan into an instant 20% market share.  The second season for the football line was much less impactful.  The brand was still able to be a player in the football cleated market and saw an increase in their on-field exposure with the signing of additional college football programs.  However, the response at retail lacked the same excitement generated from the previous year. It now appears that future growth will be slower in this category than originally expected.

The introduction of baseball cleats at retail was much less successful.  This is not a big surprise, as the macho aggressive UA brand personality is much more of a fit for the football athlete than the baseball athlete.  However, with the launch failing to meet the expectations in the retail market, there is now more uncertainty about the brand's ability to turn their apparel magic into footwear.

The future holds the key, and next on the horizon is the Super Bowl advertisement for the introduction of the cross training footwear line.  This product launch strategy is filled with potential problems. 

The Super Bowl traditionally is more about brand positioning than selling specific product.  Is this the right venue to spend a large chunk of marketing dollars to introduce the product line?  With the styles not scheduled to be delivered to the market until May, July, and November, will the marketing campaign be able to sustain interest in the interim?

The cross training category has been the poorest performing category in athletic footwear during this decade.  With 75-80% of athletic footwear purchased for light physical activity or causal wear, the cross training category struggles to achieve the comfort of running shoes and the exposure/hype of basketball shoes. 

For Under Armour to be successful with this product introduction, they will need to have a new creative approach in design and will have to convince a very conservative retail buyer to take a chance on the product. While the brand name will force some product placement, the sell-thrus will be a much greater challenge if UA does not take a new approach with this category. 

History shows many failures by athletic brands to turn footwear success into apparel or apparel success into footwear.  I anticipate UA to find the cross training arena to bring a rude awakening to their plans. How they respond will be very important to their longer term success as a brand.

So how can Under Armour sustain a 20-25% growth rate in the future? 

The available real estate in the sporting goods channel will diminish unless UA can be a much stronger force in the female sector. They are working on this part of the business.

The activewear channels of distribution are always ready, willing, and able to bring in new brands to move the business.  Since the department store channel is the main venue for activewear, this will take Under Armour into a new area frought with a different set of rules. They will need a foundation of knowledge about how to be succesful in the fickle department store environment. 

The other major growth opportunity is on the international front. The pacific rim region along with the Americas offer the greatest potential, as these consumers tend to mimic US retail more closely.  The European market, on the other hand, is a very difficult enviroment in which to take an American brand, especially when the brand has been built on a sport (American football) which draws very little interest versus their "real" football (soccer).

So after reading all of this, is Under Armour lost? Should their stock have devalued 24% in one day? 

I can't answer the last question, as I will leave that to Wall Street to answer. What I can say is that the Under Armour brand has been the most exciting brand to come along in 20 years.  The brand equity is extremely strong, with references to UA being "the current younger generation's Nike".

I saw Nike go through many ups and downs, now long forgotten by most people.  I don't have enough fingers and toes for all of the times that the investment community counted Nike out, only to spark their competitive spirit to find a way to success.

True, this is a different day and age, and there are many more pressures facing the athletic industry today than 10-20 years ago.  However, if there has even been a brand positioned to succeed in becoming a force in the athletic market, UA is in the unique position to be that brand.  The answer will be found in their ability to react to the upcoming challenges.  If they can learn from their mistakes in the short term to build a stronger brand, then they just might do it.

We will soon see how well they can protect their house.