Date
23 May 2017
After a period of rapid expansion that led to soaring costs and profit drop, Under Armour ‘s founder Kevin Plank may need to slow down and rethink his game tactics. Photo: Reuters
After a period of rapid expansion that led to soaring costs and profit drop, Under Armour ‘s founder Kevin Plank may need to slow down and rethink his game tactics. Photo: Reuters

Under Armour maintains edge despite slump

Under Armour’s shares slumped 25 percent on Tuesday after the sportswear maker reported weaker than expected results for the fourth quarter of last year. Chief financial officer Chip Molloy will step down.

The company was founded in 1996 by Kevin Plank, then a 23-year-old captain of the University of Maryland football team.

Plank didn’t like the team’s sweat-soaked T-shirts, so he decided to make a T-shirt using moisture-wicking synthetic fabrics. And that’s how his business started.

But this feature was far from unique; other major sportswear brands like Nike, Adidas and Reebok all had similar offerings.

Under Armour remained a regional brand, selling sports clothing mainly to university sports teams.

In 2000, the company received its first big break – designing outfits for Warner Brothers’ comedy film The Replacements.

Following the filmmaker’s specifications, Under Armour used tight-fit design to show off the actors’ body curves.

The feedback from viewers was highly positive. Plank saw a huge opportunity and started to focus on body-hugging sportswear.

At that time, going to the gym and practicing yoga started gaining popularity in the United States. Under Armour’s tight-fit design rode the fitness trend.

The firm later spent a big sum on R&D to develop compression shirts that support and regulate muscles.

The high-end product line based on such technology has become Under Armour’s most profitable offering in recent years.

The brand soon expanded into basketball wear and began sponsoring talented players. This is where Under Armour got another big break.

In 2011 it started to sponsor a basketball player named Stephen Curry. He was not yet a first-tier player then.

But he soon became an All-Star NBA starter and was named Most Valuable Player in 2015, elevating him to the ranks of the sport’s titans such as Michael Jordan and Kobe Bryant.

As to be expected, Under Armour shared in Curry’s success, which greatly boosted public awareness of the brand.

In its latest financial report, the company said its net revenue rose 12 percent to US$1.31 billion in the fourth quarter ended Dec. 31 from a year earlier, while its net profit eased 0.6 percent to US$105 million.

The figures were not exactly bad but the share price plummeted 25 percent.

There are a couple of things that stoked investor concern.

First, encouraged by the runaway success of the Curry sponsorship, Under Armour got very aggressive and spent a lot on celebrity endorsement.

It has also sponsored several teams in the English Premier League, leading to soaring costs and reduced margins.

Meanwhile, the costly expansion didn’t boost sales as much as it had expected. Revenue growth even slowed in recent quarters.

The US, its biggest market, only reported a 5.9 percent sales growth in the fourth quarter of last year.

The overseas market only contributes 16 percent of its total revenue, and is not yet a growth driver.

Also weighing on the stock is the high valuation. Since its initial public offering in 2005, when it was priced at US$7.5, Under Armour had charged all the way to over US$100 per share.

Before the slump on Tuesday, it was trading at a price earnings multiple of 60 times.

Its share price closed at US$21.49 on Tuesday.

Amid shaky growth prospects, the company’s P/E ratio dropped to a level more comparable with rivals such as Nike and Adidas, which are trading at 23 and 29 times respectively.

All is not lost. Under Armour still has its edge as a professional sportswear brand.

Its flagship outfit is still very much sought after by gym goers, as many of them train hard not just to keep fit but also to show off their muscles and body lines.

I recently found that nearly half of the people in my gym are wearing the brand’s outfit.

I believe the company has got what it takes to get back on the right track. All it needs now is to readjust its pace.

This article appeared in the Hong Kong Economic Journal on Feb. 2

Translation by Julie Zhu

[Chinese version 中文版]

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RT/CG

Hong Kong Economic Journal columnist

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