Billionaire investor Warren Buffett gains insight of investment from everyday life. Although this approach may not always be precise enough, if one notices a popular brand or product suddenly fall out of favor with its consumers, that is usually a warning sign.
About a year ago when I visited my gym, more than half of gym-goers there were wearing Under Armour compression shirts. However, I found that more people have switched to Nike and Adidas workout clothing in recent months.
Indeed, the share price of Under Armour has slumped 58 percent over past 12 months as it has been losing market share to its two bigger rivals.
Currently, Nike controls nearly 40 percent of the global sportswear market. Adidas, founded in Germany in 1949, has a strong hold in Europe. By contrast, Under Armour, established in 1996, has developed a niche in the gym apparel market to emerge as a serious contender.
Nonetheless, the once fast growing Under Armour has been losing ground in recent years.
One key factor being the company’s core earnings base is now being eroded.
Its iconic product Compression Series Under Armour faces increasing competition from similar offerings from Nike and Adidas.
Using Under Armour’s signature compression technology, this product line expands and contracts to form the contours of your body at rest and in motion. Such features have helped it gain popularity among gym-goers, who couldn’t care more about their appearance during the workout.
However, Nike and Adidas have also launched similar compression clothing at prices similar to that of Under Armour in recent years.
They’ve made big headway thanks to their strong financial capability and heavy spending in R&D and marketing.
For example, Adidas has hired Taiwanese actor Eddie Peng Yu-yen as endorser.
Under Armour also has a fundamental weakness, its product range is relatively narrow.
Nike and Adidas cover a wide spectrum of sports, including football, basketball, running and gym. Their also have multiple price points offerings. Under Armour largely focuses on the high-end segment.
To address such weakness, Under Armour has been aggressively expanding into the football and basketball market, and has spent heavily in hiring star players.
However, Nike and Adidas have already built their dominance in the football and basketball markets for years, while the efforts of Under Armour are yet to pay off.
National Basketball Association star Kevin Durant said last week that pros do not like the company’s shoes. “Nobody wants to play in Under Armours. I’m sorry. The top kids don’t because they all play Nike,” the All-Star forward of the 2017 champion Golden State Warriors said during an interview.
Shares of Under Armour tumbled more than 3 percent that day.
Last year, Under Armour reported sales revenue of US$4.8 billion, which represents only one eighth of Nike’s and one fifth of Adidas’.
Meanwhile, Under Armour suffered a net loss of US$14.58 million in the first half despite 7 percent sales growth due to heavy spending. The company has decided to close some of its stores and cut nearly 300 jobs.
Since hitting a peak in 2014, shares of Under Armour have lost 90 percent. Currently, its market value has fallen to US$7 billion, lagging far behind that of its two bigger rivals, Nike and Adidas.
What is going to happen to Under Armour?
I guess if it sticks to its core gym wear business, it should be able to survive, much like niche brands like Speedo, Yonex and New Balance.
The other possibility is the company may get acquired by bigger competitors or even by some Chinese buyers.
This article appeared in the Hong Kong Economic Journal on Sept. 4
Translation by Julie Zhu
[Chinese version 中文版]
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