Business strategy

Under Armour, Inc., 2013

www.ua.com , UA

Headquartered in Baltimore, Maryland, Under Armour (UA) was founded in 1996 by a former University of Maryland football player who desired a t-shirt that would whisk away perspiration rather than get soggy wet. The company has grown to be one of the most sought after brands among athletes around the world, being worn by some of the largest U.S. college football and European soccer teams. Colleges such as the Maryland Terrapins, Auburn Tigers, South Carolina Gamecocks, and many more have contracts with UA to outfit their teams. English soccer team Tottenham Hotspur, Greek team Aris F.C., and Mexican club Deportivo Toluca F.C. all are outfitted by UA. Mega stars such as Tom Brady, Cam Newton, Bryce Harper, Michael Phelps, and many more, all sponsor and market UA products.

UA designs, develops, markets, and distributes apparel, footwear, and accessories for men, women, and children worldwide. The company offers apparel in three styles: compression, fitted, and loose and designed to be worn in hot, cold, or normal weather. Footwear products include cleats for most all sports, running and basketball shoes, and even hunting boots. Accessories include gloves for football, baseball, golf, socks, and team uniforms. UA’s moisture-wicking fabrications are engineered in many different designs and styles for wear in nearly every climate to provide a performance alternative to traditional products. Its products are sold worldwide and worn by athletes at all levels, from youth to professional, on playing fields around the globe. UA’s European headquarters are in Amsterdam’s Olympic Stadium, with additional offices in Denver, Hong Kong, Toronto, and Guangzhou, China. With about 1,800 employees, UA distributes its products through specialty retailers, department stores, outlet stores, and institutional athletic departments.

For the second quarter of 2013 that ended June 30, 2013, UA reported that revenues increased 23 percent to $455 million while the company’s net income increased 163 percent to $18 million compared to the prior year’s period. The company’s apparel revenues increased 23 percent to $310 million, primarily driven by a new baselayer product and the expansion of the Storm and Charged Cotton products. The company’s second quarter footwear revenues increased 21 percent to $82 million, spurred by the Highlight football cleat and the UA Spine platform. UA’s Q2 2013 accessories revenues increased 30 percent to $51 million, primarily driven by headwear. For the quarter, UA’s Direct-to-Consumer revenues represented 30 percent of total net revenues and grew 29 percent year-over-year. The company’s Women’s category is doing well with its new Studio and ArmourBra products, and the Spine running footwear is doing well.

Copyright by Fred David Books LLC. (Written by Forest R. David)

History

At age 23, Kevin Plank developed a new t-shirt in his grandmother’s basement in Washington D.C. after noticing that his compression shorts always stayed dry, but t-shirts had to be changed frequently because they became sweat soaked. This observation led Plank to create a new compression t-shirt that whisked away sweat. After graduating, Plank provided this t-shirt to his former teammates who were playing in the National Football League (NFL). After positive reviews, UA had t-shirt orders totaling $100,000 in 1997. UA’s first big break came when USA Today pictured Oakland Raiders quarterback Jeff George wearing UA apparel. In late 1997, Georgia Tech asked for 10 shirts, ultimately leading to deals with Georgia Tech, Arizona State, and North Carolina State universities.

In the 2000s, UA expanded rapidly after outfitting Warner Brothers with apparel for two films, and an advertisement placed in ESPN Magazine generated $750,000 in sales. In 2003, UA became the outfitter of the now defunct XFL football league and launched its first TV advertisement with the motto “Protect this House.”

UA recently opened specialty stores, including a 6,000-square foot store in Illinois and has opened factory outlet stores in 34 states. In 2011, the company purchased 400,000 square feet of office space for $60.5 million. UA has new contracts with the NFL, National Basketball Association (NBA), and Major League Baseball (MLB) to produce footwear, apparel, and accessories. Many European football teams such as Trottenham Hotspur and other rugby teams are outfitted with UA products. None of UA’s 5,900 employees are members of a union, and 1,900 are full-time.

Internal Issues

UA owns no fabric or process patents. Thus, UA competitors can manufacture and sell products very similar to UA products. UA’s success thus hinges a lot on their brand image, trademarks, and copyrights.

Vision and Mission

Regarding UA’s vision, CEO Plank recently said:

· Our investments illustrate our commitment to realizing our long-term vision of one day having our Women’s business larger than Men’s, Footwear larger than Apparel, and our International business larger than our U.S. business.

Organizational Structure

UA reportedly operates under four geographic segments: (1) North America, (2) Europe, the Middle East, and Africa (EMEA), (3) Asia, and (4) Latin America. However, from its organization structure revealed in Exhibit 1 , it appears the company is structured divisionally by product.

Marketing

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UA’s marketing expenses were $205.4 million in 2012, up from $167.9 million the prior year. But these marketing expenses were 11.2 percent of revenues, down from 11.4 percent the prior year. UA’s advertising expenditures in 2012 and 2011 were $205.4 million and $167.9 million respectively. UA develops and markets products primarily for use in athletics, fitness, and any outdoor activities. UA attempts to drive demand through brand equity and increasing consumer awareness of its superior product. UA’s growth is largely dependent on sales from Dick’s Sporting Goods, The Sports Authority, and Foot Locker, which have store-within-a-store sales channels. However, UA has been making great strides selling its products directly to consumers, with 29 percent of revenue in 2012 coming from direct sales. UA has the brand strength to attract many consumers to more profitable channels. However, 69 percent of 2012 revenue was from wholesale, and 2 percent from licenses.

A key strategy for UA is securing endorsement of its products from high-performing athletes who have significant influence in the NFL, NBA, MLB, and even high school teams. Many sports stars such as Cam Newton and Tom Brady endorse and wear UA products. It is UA’s belief that this strategy is the best possible way to advertise its products because many fans become familiar with UA products seeing them worn by high-performing athletes on a year round basis. In addition to focusing on the large-market leagues, UA also focuses on brand authenticity from a more grassroots level. By hosting camps, clinics, and other activities for young athletes, it is able to gain a firsthand appreciation for UA’s product quality and brand equity.

UA uses broadcast, print, and social media outlets to promote the firm’s product. UA also engages in acquiring prime real estate in the 25,000 major retail stores worldwide in which their products are sold, as well as operating outlet stores in 34 different states. UA products are sold throughout the world. New UA products in 2012 included UA Studio line, the Armour Bra, cold-back technology, UA Spine footwear, and UA scent control technology.

“The biggest, baddest brand on the planet, bar none.” That’s how founder and CEO Plank likes to describe his vision for what UA can ultimately become. Plank and his team are excellent marketers; the company’s blood-pumping ads resonate with athletes and those who aspire to become athletes. UA’s bold logo and brash and edgy marketing campaigns inspire movement and physical fitness, positioning the company well within the healthier lifestyle megatrend. Plank and his team relish their underdog image versus big rival firms; they love to operate within and promote an “us-versus-them” philosophy. This competitive fire has served UA well and has encapsulated many athletes and fans.

UA has 102 factory house stores in North America, mostly located in the eastern USA. UA opened its first factory house store in Canada in 2012.

Kevin Plank, CEO and Chairman of the Board Brad Dickerson, Chief Financial Officer Kip Fulks, Chief Operations Officer Adam Peake, Senior Vice-president U.S. Sales Henry Stafford, Senior Vice-president of Apparel Karl-Heinz Maurath, President International John Rogers, Vice-president and General Manager of E-commerce Matthew Mirchin, Senior Vice-president Global Brand and Sports Marketing Byron Adams Jr., Chief Performance Officer Gene McCarthy, Senior Vice-president Footwear

Finance

In late 2012, UA has an impressive annual growth rate of 34 percent since 2005, has a market cap of $4.32 billion, and a price-to-earnings (P/E) ratio of 49.4, above the S&P 500 P/E ratio of 17.7. UA shares were up 44.6 percent year-to-date as of December 20, 2012. Strong financially, UA has used zero of its $300 million revolving credit facility at the end of September 2012. UA’s debt-to-equity ratio is low at 0.10. UA has a quick ratio of 1.84 and has improved its earnings per share by 22.7 percent in the most recent quarter compared to the same quarter a year ago. UA does not pay dividends, preferring to reinvest all earnings back into the firm.

UA expects 2012 net revenues of approximately $1.82 billion, representing growth of 24 percent over 2011, and 2012 operating income of approximately $207 million, representing growth of 27 percent over 2011. Plank says: “I am proud of what our team has accomplished so far this year and we are well positioned for growth in 2013 and beyond. I emphasize ‘team’, as we continue to make great strides with the additions of seasoned leadership in Supply Chain, Women’s, and International.”

UA revenues increased 24 percent in the third quarter of 2012 to $575 million compared with net revenues of $466 million in the previous year’s period. Net income increased 25 percent. UA’s recent income statements and balance sheets are provided in Exhibits 2 and 3 , respectively. Note that the company pays no dividends and is performing in an excellent manner.

Segment Data By-Product

Exhibit 4 provides a breakdown of UA’s revenues by product. Note that apparel continues to be the strongest product offered based on net revenues, but footwear and accessories such as bags, hats, and gloves experienced higher percent increases over the most recent fiscal year. License revenues decreased as a result partly of less orders of hats and bags. Seventy-six percent of company revenues are derived from apparel in 2012. Followed by footwear at 13 percent and accessories at 9 percent.

EXHIBIT 2

Under Armour Statements of Income (In thousands, except per share amounts)
	Year Ended December 31,
	2012	2011	2010
Net revenues	$1,834,921	$1,472,684	$1,063,927
Cost of goods sold	955,624	759,848	533,420
Gross profit	879,297	712,836	530,507
Selling, general and administrative expenses	670,602	550,069	418,152
Income from operations	208,695	162,767	112,355
Interest expense, net	(5,183)	(3,841)	(2,258)
Other expense, net	(73)	(2,064)	(1,178)
Income before income taxes	203,439	156,862	108,919
Provision for income taxes	74,661	59,943	40,442
Net income	$128,778	$96,919	$68,477
Net income available per common share
Basic	$1.23	$0.94	$0.67
Diluted	$1.21	$0.92	$0.67
Weighted average common shares outstanding
Basic	104,343	103,140	101,595
Diluted	106,380	105,052	102,563

Source: 2012 Form 10K, p. 49.

EXHIBIT 3 Under Armour Balance Sheets

Under Armour, Balance Sheets (In thousands, except share data)
	December 31, 2012	December 31, 2011
Assets
Current assets
Cash and cash equivalents	$341,841	$175,384
Accounts receivable, net	175,524	134,043
Inventories	319,286	324,409
Prepaid expenses and other current assets	43,896	39,643
Deferred income taxes	23,051	16,184
Total current assets	903,598	689,663
Property and equipment, net	180,850	159,135
Intangible assets, net	4,483	5,535
Deferred income taxes	22,606	15,885
Other long-term assets	45,546	48,992
Total assets	$1,157,083	$919,210
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$143,689	$100,527
Accrued expenses	85,077	69,285
Current maturities of long-term debt	9,132	6,882
Other current liabilities	14,330	6,913
Total current liabilities	252,228	183,607
Long-term debt, net of current maturities	52,757	70,842
Other long-term liabilities	35,176	28,329
Total liabilities	340,161	282,778
Commitments and contingencies
Stockholders’ equity
Class A Common Stock, $0.0003 1/3 par value; 200,000,000 shares authorized as of December 31, 2012 and 2011; 83,461,106 shares issued and outstanding as of December 31, 2012 and 80,992,252 shares issued and outstanding as of December 31, 2011.	28	27
Class B Convertible Common Stock, $0.0003 1/3 par value; 21,300,000 shares authorized, issued and outstanding as of December 31,2012 and 22,500,000 shares authorized, issued and outstanding as of December 31, 2011.	7	7
Additional paid-in capital	321,338	268,206
Retained earnings	493,181	366,164
Accumulated other comprehensive income	2,368	2,028
Total stockholders’ equity	816,922	636,432
Total liabilities and stockholders’ equity	$1,157,083	$919,210

Source: 2012 Form 10K, p. 48

Apparel is offered in many styles and fits to cover most any environment condition. Apparel is specifically engineered to replace traditional nonperformance fabrics and replace them with the most cutting edge products available. UA currently has three gear lines that achieve the designed purpose of having a sophisticated apparel option for all weather conditions. The three products are marketed under HEATGEAR, designed for hot weather, COLDGEAR, designed for cold temperatures, and ALLSEASONGEAR, designed for between the extremes. In addition to the three temperature ratings, all products also come in three fit types: compression (tight fit), fitted (athletic fit), and loose (relaxed). All UA appeal products are designed to whisk water away from the wearer to keep them as dry and comfortable as possible in any temperature or type of activity.

UA expanded into offering footwear in 2006 and today makes footwear for virtually all sports including running and even hunting boots. Like the traditional shirts, footwear offerings are designed to cushion and manage moisture. In 2011, UA began to sell hats and bags in house; these products were previously provided by a licensee. Other accessories developed and now marketed by UA include gloves for football, baseball, golf, and running as well as mouth guards, socks, and eye wear.

Segment Data By Region

EXHIBIT 4 UA Segment Data by Product

	Year Ended December 31 (in Thousands),
				Percent Change
	2012	2011	2010	2012	2011
Apparel	$1,385,350	$1,122,031	$853,493	23.5%	31.5%
Footwear	238,955	181,684	127,175	31.5	42.9
Accessories	165,835	132,400	43,882	25.3	201
Total net sales	1,790,140	1,436,115	1,024,550	24.7	40.2
License revenues	44,781	36,569	39,377	22.5	(7.1)
Total revenues	1,834,921	$1,472,684	$1,063,927	24.6%	38.4%

Source: 2012 Form 10K, p. 29.

Exhibit 5 reveals UA’s recent revenues and operating profits for the North American and international markets. UA reports revenues in four distinct geographic regions: (1) North America, (2) EMEA, (3) Asia, and (4) Latin America. Each geographic segment operates in the same manner, to design, develop, market, and distribute UA products. Note that only 6 percent of UA revenues were derived from international markets so the company combines all these countries into one segment for reporting reasons. UA acknowledges that the trend in performance products is becoming increasingly global with a bright future, but 6 percent so far leaves tremendous upside for the company.

UA’s North American segment includes about 18,000 retail stores; UA also owns 80 outlet stores located in 34 different states. The company’s two largest customers are Dick’s Sporting Goods and The Sports Authority. In addition to selling to the public, UA earns income from the sale of uniforms and practice gear to high school, college, and professional teams.

In EMEA, UA products are sold in approximately 4,000 retail outlet stores. European football teams that wear UA gear reside in many European nations including the United Kingdom, France, Germany, Greece, Italy, and Spain among others. First division rugby clubs in France, Ireland Italy, and the United Kingdom also wear UA products. Products in Europe are currently distributed out of The Netherlands.

Since 2002, UA has enjoyed a licensing agreement with Dome Corp., which produces and sells UA products in Japan, which are all tailored for Japanese consumers’ specific taste. Products are sold in more than 2,500 specialty stores in Japan, as well as to several professional soccer and baseball games in Japan. Also in Asia, products are sold in both Australia and New Zealand, and in 2011, UA’s first specialty store opened in Shanghai, China. Latin American customers are provided UA products through independent distributors but more commonly are served through distribution facilities in the USA. Only 6 percent of UA’s 2012 revenues were generated from outside North America. The company does have two specialty stores in Shanghai, China. About 55 percent of the fabric used in UA products comes from suppliers in China, Malaysia, Mexico, Taiwan, and Vietnam. UA has 27 manufacturers in 14 countries.

Competition

UA has unique branding of a fabric to whisk away water from the body, but competitors such as Nike and Adidas have copied UA’s designs and technology. The fabrics UA uses are not unique to them, and it does not control any patents on fabrics or processes. It is all about branding for UA. Because firms such as Nike and Adidas have much larger resources to draw on, competing long term may be difficult for UA, but so far the firm is doing well. In addition, competing for floor space at large retailers is difficult because many stores have their own store brands, in addition to private label brands, all competing for floor space.

EXHIBIT 5 UA Segment Data by Geographic Region

	Year Ended December 31 (in Thousands),
	2012	2011	2010	Percent Change
Net Revenues
North America	$1,726,733	$1,383,346	$997,816	38.6%
Other Foreign Countries	108,188	89,338	66,111	35.1%
Total Net Revenues	1,834,921	1,472,684	1,063,927	38.4%
Operating Profits				2012	2011
North America	$197,194	$150,559	$102,806	31.0%	46.4%
Other Foreign Countries	11,501	12,208	9,549	(5.8)	27.8
Total Operating Profit	208,695	162,767	112,355	28.2	44.9

Source: 2012 Form 10K, p. 33.

Exhibit 6 provides some comparative information for UA and rival firms. Note that in terms of revenue UA is about the size of Columbia Sportswear, but Nike and Adidas are both more than 10 times the size of UA. Note also that UA is exceptionally efficient as indicated by its high revenue per employee ratio.

EXHIBIT 6 Comparative Information for Sports Apparel Firms

	Under Armour	Adidas	Columbia Sportswear	Nike
Number of Employees	1.9K	39.9K	4.1K	40K
Net Income ($)	98.9M	922M	94.6M	2.2B
Revenue ($)	1.54B	17.1B	1.7B	24B
Revenue ($)/Employee	855K	429K	414K	600K
EPS Ratio ($)	0.95	2.20	2.78	4.73
Market Cap.	5.2B	15.3B	1.8B	42.6B

EPS, earnings per share.

Source: Based on company documents.

Nike

Headquartered in Beaverton, Oregon, Nike is the largest apparel and footwear provider for men, women, and children worldwide. Nike outfits athletes globally in virtually every sport, including running, basketball, football, soccer, golf, and many more. In addition to apparel and footwear, Nike also produces golf clubs, athletic bags, gloves, footballs, bats, and much more. Nike owns brands such as Converse, Chuck Taylor, and All Star to name a few.

Nike reported in 2011 that 42 percent of revenues derived from U.S. operations, where the company sells its products in a wide range of mediums from retail stores, its Internet site, 156 Nike factory stores, and tens of thousands of other stores, such as Foot Locker. Nike’s international sales accounted for 58 percent of revenues in 2011 and products are sold in similar ways as in the USA. Nike currently operates 308 factory stores outside the USA. Approximately 67 percent of all Nike North American revenues are derived from footwear, 28 percent from appeal, and only 5 percent from equipment. Nike’s operations in international markets have a similar revenue breakdown by product, making Nike’s primary revenue generator footwear, as opposed to UA being primarily an apparel producer.

Like UA, Nike outfits many professional and major U.S. college teams with their gear. Notable teams wearing Nike gear include the University of Oregon, Penn State University, and The University of Alabama. Nike has stars such as Michael Jordan, LeBron James, and Tiger Woods serving as spokespersons to help in promoting the brand. Late in 2012, Nike sold its Cole Haan handbag and shoe brand to private equity firm Apax Partners for $570 million and also sold its Umbro football brand to Iconix Brand Group for $225 million.

Adidas AG

Headquartered in Herzogenaurach, Germany, Adidas AG develops and produces a wide range of athletic appear, footwear, and accessories and operates in six business segments: wholesale, retail, TaylorMade-Adidas Golf, Rockport, Reebok-CCM Hockey, as well as other brands. Adidas sells its products through retail stores, the Internet, and through 2,401 company-owned stores worldwide. The company most closely competes with UA with its sport performance line of apparel that is modeled after UA fabrics to help keep athletes dry and comfortable for the duration of their activity.

Adidas currently has a contract with the NBA to outfit all teams with apparel, and in addition, Adidas outfits some or the largest European football clubs with apparel. Adidas employs many of soccer’s biggest starts to market their products, such as Frank Lampard, Steven Gerrard, and Micheal Ballack. Tennis stars endorsing Adidas include Andy Murray, Justine Henin, Marcos Baghdatis, and many more. Andy Murray is Adidas’s highest paid spokesman with a five-year contract worth $24.5 million.

Adidas had sales of more than 13 billion euros in 2011, an 11-percent increase from the previous year, with every reporting segment enjoying larger revenues than the previous fiscal year. The retail and TaylorMade-Adidas Golf segments enjoyed the largest percent increases at 20 and 16 percent, respectively.

Columbia Sportswear Company

Headquartered in Portland, Oregon, Columbia’s trademark Bugaboo parka with weatherproof shell competes with some UA products, as does Columbia’s performance apparel for a variety of activities and Columbia’s sportswear accessories, boots, and rugged footwear, sold under brands Columbia, Mountain Hardwear, Sorel, and Montrail. Columbia brands are used globally during outdoor activities, such as skiing, snowboarding, hiking, climbing, camping, hunting, fishing, running, and the like. Columbia operates about 50 outlet retail stores and 10 branded retail stores in the USA, as well as 10 in Europe, 2 outlet stores in Canada, and about 300 stores in Japan and Korea. Thousands of other stores sell Columbia products globally, including even Dick’s Sporting Goods and The Sports Authority that UA counts on most.

External Issues

Economic Factors

The apparel industry has a mediocre outlook given weak economies in which consumers are faced with less discretionary income. Items expected to maintain strong sales are those that are well differentiated from competing products, where consumers value the extra features and are less price sensitive to products they deem necessary. More luxury items in both sporting activities are expected to have modest growth. In 2011, the apparel industry reported sales up 5.9 percent over 2010, however much of this gain was the result of inflation and the rising prices of commodities such as cotton, increased labor wages overseas, and increased freight fees. Nevertheless, the S&P Apparel Retail Index rose 22 percent versus a 12-percent increase for the S&P 1500 Index from March 2011 to March 2012. The S&P Footwear Index rose only 11.5 percent during this same time frame.

Apparel sales totaling $77.7 billion was imported into the USA in 2011, up nearly 9 percent from 2010. Approximately 38 percent of all apparel imported came from China. The apparel industry is extremely fragmented with many firms competing for the same customers. For example, the top 10 national brands only account for 16 percent of wholesale apparel sales in the USA with 84 percent of apparel distributed coming from smaller brands and store brand goods. Women’s segment has traditionally accounted for significantly more sales at 55 percent. Men only accounted for 28 percent and children 17 percent of apparel sales in 2011.

The footwear industry grew at a slower rate than apparel in 2011. Fashion footwear accounted for 48 percent of total footwear sales, with performance footwear accounting for 27 percent, sports footwear 13 percent, outdoor footwear 8 percent, and work and safety foot-wear 4 percent. Fashion and sports footwear are expected to be the most significant areas of growth moving forward as people look to improve their fashion looks and the growing health-minded concerns of the public.

Technological Changes

Nike was one of the first companies to understand the importance of producing better sporting apparel and footwear for athletes, when Phillip Knight and his track coach Bill Bowerman developed a better shoe for members of the University of Oregon track team. Since the 1960s, there have been many developments and improvements in shoe and apparel design away from the traditional cotton sweat suit and basic tennis shoe. Today, apparel hugs the body and insulates the wearer from cold and keeps them cool from hot. Shoes can be synced to computers to determine performance and impact points for the runner and t-shirt fabrics can even help manage odors. These types of technological offerings keep customers purchasing new items and can create intense competition and brand loyalty.

Where to Produce

China has historically been the low-cost alternative for apparel firms when selection a nation for the production of their products. In 2011 alone, 38 percent of all apparel imports and 74 percent of all footwear imports into the USA came from China. However, with rising production costs, higher wages in China, increased transportation costs and less control over quality, Chinese imports may be waning in the eyes of large U.S. apparel corporations in favor of facilities in Mexico and the Caribbean. UA currently produces many of their items in Mexico and enjoys quicker turnaround and more quality control than some rival firms who import a large percentage of their inventory from China.

The Future

UA needs considerably more global presence to gain economies of scale versus its large rival firms. Increasing downward pressure on prices could necessitate that UA effectively expand globally. The primary strategic issue facing UA therefore is how and when and where to expand globally. Other secondary strategic issues facing UA include whether to diversify into other accessory items to reduce the firm’s reliance on apparel and whether to increase its expenditures on R&D to keep pace with changing technological advancements in the apparel industry. UA is strong financially, which does enable the firm to make strategic acquisitions as needed, so the firm should identify potential acquisition candidates around the world. Effective global expansion is an important key to UA’s growth and prosperity in the future. Even South America, Central America, Mexico, and Australia are all sports-minded areas in which UA products should be well received. Perhaps what UA needs most is to fulfill CEO Plank’s vision: “Our long-term vision is to one day have our Women’s business larger than Men’s, our Footwear business larger than Apparel, and our International business larger than our USA business.”

Prepare a five-year strategic plan for CEO Plank to fulfill his vision for UA.