Under Armour just discovered a multi-million dollar opportunity
Under Armour has had success in the outdoor category, and with its upstart ethos still intact, it's poised to continue to take share from better established competitors.
Its authenticity and quality will allow it to compete with the likes of Patagonia and REI and reward shareholders along the way.
Under Armour has had an impressive run during its 20-year history, going from zero to $4 billion in annual sales over that period. But it still has a long way to go to catch Nike, with over $30 billion in revenues for the year.
The Maryland-based company isn't focusing on one particular area. Basketball, connected technology, golf, and many other segments all need to grow for Under Armour to reach the CEO's goal of $10 billion in revenue by 2020. Taking a larger share of the outdoor apparel and footwear market is an important part of the company's strategy, as well. In 2014, 56% of annual consumer spending on outdoor activity equipment and apparel in the United States went to apparel and footwear, with the rest going toward equipment and gadgets.
In a press release outlining its 2015 results, Under Armour wrote that "apparel net revenues increased 30% to $2.29 billion compared with $1.76 billion in the prior year, driven primarily by category expansion in training, outdoor, golf, and studio." A look through the biographies of C-suite members shows a bent toward outdoor executives. Before becoming COO in 2011, Kip J. Fulks was SVP of outdoor and innovation for nearly three years, while the chief merchandising officer spent time as senior vice president of apparel, outdoor, and accessories earlier in his career.
The challenge: authenticity
The biggest players in the outdoor apparel space have been engaged with consumers for decades and have built a level of trust that's hard to match overnight. When real dangers exist, such as hypothermia, dehydration, and the like, brands are more powerful than usual. A skier should feel more comfortable heading out for a three-night trek with his or her Patagonia gear — a brand that person has used for decades — than taking a chance that Under Armour can meet the skier's required specifications and hold up to the elements. Under Armour can earn this trust, but it's an uphill battle.
Patagonia, founded in 1973, did $600 million in sales in 2013. That number rose to $750 million in 2015. Since current CEO Rose Marcario joined the company — as CFO in 2008 before moving to the top job in 2013 — profits have more than tripled. REI, a company organized as a consumer cooperative, delivered revenues of $2.2 billion in 2014.
REI facebookThere are pro-social elements to both companies that seem to resonate with the outdoor apparel consumer and make it more difficult for behemoths like Nike to take market share. Patagonia donates 1% of sales to environmental causes, strives to support humane working conditions throughout its supply chain, and encouraging customers to repair clothing rather than immediately buy new pieces in order to reduce strain on the planet.
REI closed all of its locations on Thanksgiving, Black Friday, and didn't process any online orders until Saturday November 28th. In a letter to members REI CEO Jerry Stritzke explains his rationale, "We believe that being outside makes our lives better. And Black Friday is the perfect time to remind ourselves of this essential truth." This might be a marketing ploy but it shows members that the cooperative prioritizes a higher purpose above profit at all costs.
Under Armour's underdog spirit
Basketball players and sneaker fans are two other groups that are brand loyal and crave authenticity. Under Armour has competed, and won battles against Nike in the basketball sneaker and apparel business. Companies earn respect and prove authenticity over time. Under Armour has done so in the basketball business and there's no reason to believe that it can't do the same with the outdoor community.
For a professional basketball player, especially one who suffers from ankle issues such as Stephen Curry, a sneaker is one's livelihood. It's penny wise and pound foolish to take a bit more money to wear a lesser-known brand that may hurt your performance when Nike sneakers, designed for your foot, can help with health and performance. A bigger endorsement contract isn't worth it unless the products offered will allow the player to perform up to his highest standards. Under Armour convinced Curry that they could keep him healthy and help him reach his potential on and off the court.
Since signing with Under Armour in 2013 and using its products, Curry has won an MVP, been part of a championship team, and has remained injury-free. Under Armour sold Curry — a world class athlete — on the quality of its goods, and delivered. It's not hard to imagine that it can convince outdoor enthusiasts — who should be less fickle about their apparel and footwear choices than Curry is — about its quality and authenticity.
REI facebookIn 2014, the top 10 selling signature basketball sneakers were all Nike or Adidas. Under Armour is already making progress in this area. Net revenue from footwear increased 95% to $167 million in Q4. The line of Curry signature basketball shoes along with an expanded line of running products were the main drivers of this growth.
The company's current outdoor headquarters is located in Baltimore, but it's planning a move to a 64,000-square-foot space in Portland, Ore. Under Armour is seeking to become more engaged with the outdoor enthusiast community, including launching a line of trail apparel and running shoes, and expanding geographically from its Maryland roots.
Under Armour's director of marketing for outdoor apparel, Steve Metcalf, gave a quote to Outside Magazine about the project: "[A]uthenticity and innovation are how we've won every category we've been in. We'll do it in the outdoor market, too." I look forward to seeing the company execute on this vision, and with shares trading around 20% off recent highs, I recommend taking a deeper look at this wonderful business.