Under Armour, Under Siege

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\"RRThe only thing on Earth that can grow into infinity and beyond is the bamboo in my front lawn. Four sprigs of it were planted 50 years ago and nothing has been able to stop it; not setting it on fire, poisoning it, stomping on the baby sprigs, pulling it out by its roots – nothing. It now threatens to eat my house. And I’ve warned my neighbors that they might want to consider moving before it swallows them.

So I know bamboo. And Under Armour ain’t no bamboo. The brand’s CEO, Kevin Plank, apparently thought it was when he metaphorically planted a few “sprigs” some 20 years ago. As I have written, being the great athlete that he was, he dazzled the performance sports apparel space almost overnight with his high-tech, sweat-wicking t-shirt that he placed in huge volumes across the professional and non-professional world of sports. His contact network was impeccable and huge. So from zero to $4.8 billion in 2016, and an IPO along the way, Plank is still squarely in the public eye. Channeled through Wall Street with growth expectations that became super aggressive, Under Armour is indeed, bamboo-like. Of course, Plank’s no “withering willy.” With his own outsized confidence and aggressive appetite for growth, he even put Nike in his sights, which led him to launch into the athletic footwear business. Hey, okay so far. After all, UA is all about sports. Clothes, sneakers, and accessories fit nicely under the brand’s DNA and mission. He also envisioned further growth through direct distribution, not only online, but also through opening Under Armour stores, now numbering about 160 along with some 146 outlet stores in the U.S.

Mr. Plank Learns the Hard Way

Well, as I’ve said, Under Armour ain’t no bamboo. Furthermore, nothing on Earth has infinite growth (except the bamboo in my yard). And Mr. Plank is now learning this. As reported, his steady stream of 26 quarterly sales increases of 20 percent plus, got slammed by Under Armour’s recent 4th quarter sales growth of only 12 percent. They also lowered their growth projection for 2017 to 11-12 percent and added that operating income would decline. Furthermore, gross margins dropped from 48 percent last year to 44.8 percent, and have been falling since the first quarter of 2015.

They also said they could not offset the sales and margin declines by cutting costs. And the mess is compounded by the fact that they have to invest in growing footwear, the international business and e-commerce, to reach their goal of a $10 billion business from $4.8 billion in 2016.

Whoa!! As this information and its projections were released, Under Armour stock took a 25 percent dive.

An “Alternative Fact”

But, wait a second. The brand’s footwear sales grew a whopping 36 percent in that quarter. But, wait another second. That’s what one might call an “alternative fact” (where’s Kellyanne when we need her?). NPD, the leading industry source for apparel and footwear sales tracking, gives us the “alt-fact” that UA’s footwear sales actually declined 20 percent in the quarter.

It turns out that both numbers are factual. UA’s number combines their direct to consumer sales with its wholesale revenues, while NPD only tracks total consumer sales. UA is not trying to fool the market with the higher number because the SEC demands the combined sales be reported. However, it does send a faux-positive message for the less enlightened people who don’t understand the difference. Simply, UA sold lots of shoes to retailers, who in turn sold a lot fewer to consumers, which means tons of inventory was left sitting in those stores. And guess what happens to that inventory? You got it. It goes into the insane promotional machine. It also means that those retailers are likely to buy less of UA footwear in the future.

Thus, NPD’s alternative fact of a 20 percent decline in footwear sales is the truer metric on UA’s performance. Worse, arch rival Adidas’ retail sales (to consumers) nearly doubled in the second half of 2016, while their wholesale numbers will not be up for the year. What this means is that consumers were buying Adidas footwear at a rapid rate, thus reducing the brand’s in-store inventory, thus reducing the goods they have to discount.

Speaking of Adidas, they ceded their number-two position in 2014 to UA, as its sales were rocketing up. But, with UA’s recent performance gaffes, Adidas won back its number-two spot (Nike, of course, reigns as king of the space).

Another driver of a huge loss of business for UA was the liquidation of Sports Authority and Sports Chalet. Combined, they represented 20 million square feet of retail space or 10 percent of all sporting goods space in the U.S. Finally, the category of performance basketball shoes (dropped by 20 percent in 2016.

UA is The “JV” Team in the Growth Trap

So Plank is entering the growth trap. He hits the wall for a quarter, gets slapped down by Wall Street, feels the pincers of Nike and Adidas slapping him around like UA is the “JV” team, and now his ego (quite oversized as it is) is hanging out on a limb – in public. He deludes himself into believing that he can drive perpetual high double-digit growth (like the bamboo in my yard). And one way in which he believes he can do this is by getting into the fashion business and participating in the old world department store sector, which is falling apart as I write. He hires a designer and flails his way forward. One deal is with Kohl’s to develop collections of men’s, women’s and children’s apparel called Simply Under Armour. Next, it’s UAS, a brand of premium sportswear, said to be technically infused (and what would that be and who cares?). Kicked off during Fashion Week in New York, the line is 60 percent men’s, 40 percent women’s, and has some space in Barney’s New York. What does Plank know about sportswear? I guess it doesn’t matter if he surrounds himself with a team that does.

Mr. Plank created a powerful brand that grew into the sky in a short period of time. He “stuck to his knitting” (pun intended), which is performance sportswear. Now, with a really bad quarter, the growth trap beckons. Once in the trap, brands will flail around looking for growth anywhere they can find it.

That’s the beginning of the end. Mr. Plank, you are not the bamboo in my yard. Stick to your knitting and achieve reasonable, but more profitable growth.



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