FINANCE

Analysis: Under Armour has lost its way in U.S.; needs to rethink strategy

Although Under Armour’s results are better than the last quarter, they still show signs of a company in difficulty. This is most evident in terms of disparities in regional revenue growth and the losses posted to the bottom line.

There is some comfort to be taken in the 4.6% revenue growth, which represents a marked improvement on last quarter’s 4.5% decline. However, this headline figure is driven entirely by international operations, where sales rose by 46.5%.

While overseas growth is to be applauded, it carries investment costs and also accounts for just 25% of group revenue. As such, Under Armour is reliant on its North American operation to drive performance on both the top and bottom lines. Unfortunately, the North American division had a lamentable quarter and is the main source of Under Armour’s woes.

North American revenue fell by 4.5% over the prior year. Admittedly this is better than the 12.1% dip posted last quarter, but it also coincided with a period of robust consumer spending growth. As such, we believe there has been little improvement in Under Armour’s relative underperformance. On top of this, the region made an operating loss of almost $44 million; something that compares unfavorably to the $157 million profit posted in the prior year.

So what went wrong in North America? There are a few specific things we would highlight.

The first of these is the brand seems to have lost power. Compared to last year, Under Armour was firmly off the radar for holiday gifting. Far fewer people thought of or requested the brand for gifts, and consequently fewer people bought into it. In our view, Under Armour has spent too much time trying to expand its footprint and product coverage, and too little time building connections with customers.

We would also call Under Armour out on customer experience. Customer service at some of its own stores leaves a lot to be desired. Meanwhile, expansion into retailers like Kohl’s has weakened exclusivity and made the brand feel commoditized and ubiquitous.

These actions show in our consumer data, which reveals Under Armour has lost its way. Consumers are unsure of what it stands for, what it specializes in, and why they should use it. For many, it has become something of an also-ran. These shallow roots are dangerous: they leave Under Armour vulnerable to competition and the vagaries of changing market conditions.

A brand like Lululemon is an interesting counterpoint to Under Armour. It has a very clear sense of identity, and its approach is more disciplined and focused. This has helped it to maintain price integrity and remain a destination of choice for many consumers. While we do not believe that Under Armour should simply emulate Lulu, we do think it can learn some lessons from its playbook.

Looking ahead, it is clear that 2018 will not be a year when growth resumes. Indeed, the company has penciled in a further full-year revenue decline in North America. Operating profit will also be weak thanks to restructuring and impairment costs.

For all of this, Under Armour still has potential; but it needs to use the year ahead to regroup and rethink its strategy. The company that once believed it could challenge Nike has come down to earth with a bump. Humble reflection is now the order of the day.

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