Analysis: Under Armour needs to carve out a more distinct and edgy position

There is good news and bad news from Under Armour’s latest set of results. The positive is that operational changes appear to be working and have allowed the company to reduce losses from $105 million last year to $11.5 million this time around. The negative is that sales in the core North American division are still sliding as the company grapples to rebuild brand equity and to create resonance with consumers.

Revenues in the North American division – which accounts for 68% of all sales – have now been falling for a year. This quarter’s figures provide little relief, with the pace of decline accelerating. Fortunately, some of this deterioration is due to a deliberate strategy to preimmunize and rationalize assortments – which has diminished sales in the off-price channel and has reduced the volume of lower-priced items available. On balance, we believe these moves are sound: they address Under Armour’s central problems of a lack of brand clarity and its fall from grace as a performance sports brand.

The strategy is working inasmuch as it has allowed Under Armour to gently rebuild North American profitability. However, we have some concerns about the speed with which perceptions are changing. Despite the play having been in place for some time, we see little evidence of a material pick up in the way consumers, and especially women consumers, see Under Armour. Our data show the company's ratings on measures like quality, performance and design are still below Nike’s and a long way below more focused players like Lululemon. There has been modest improvement over the past year, but not to any significant degree. However, with the sports apparel space becoming increasingly crowded, Under Armour needs to carve out a more distinct and edgy position.

We do see some initiatives as having the potential to change this, such as the mineral-infused fabrics under the UA Rush and UA Recover sub-brands, or the UA HOVR sneakers. These products are more aligned to the values of innovation that Under Armour espoused when the business was younger, and they are the type of items that should excite both keen and occasional amateur athletes alike. The challenge now facing Under Armour is to clearly communicate the strength of its innovations and performance technologies so that it can win back customers it has lost to rivals. This, in our view, will be a gain that is only realized over the medium to longer term.

It is also worth noting that Under Armour still has a lot more work to do with women. While brand equity with female consumers has picked up moderately over the past half year, it is a long way behind rivals and still has work to do to shed the dark, masculine image it has cultivated over a long period of time. This stands in direct contrast to Nike, which has a much better gender balance, and to Lululemon which has successfully developed a comprehensive range for men alongside its core offering for women.

Looking beyond the North American core, we remain encouraged by some of the opportunities from overseas – in markets where the brand does not carry as much historic baggage. European operations have swung into profitability and will no doubt be enhanced by a new regional HQ in the Netherlands which will provide focus to the area. Meanwhile, sales growth in Asia is also strong and the recent entry into high-growth markets like India will support further expansion.

Overall, Under Armour is on the right track but it now needs to up the pace.