CASE 8 Under Armour’s Strategy in 2020: Can It Revive Sales and Profitability in Its Core North American Market? Arthur A. Thompson, The University of
... [Show More] Alabama Going into 2020, Under Armour was headed into its fifth consecutive year of sales difficulties in its core North American market which accounted for over two-thirds of the company’s annual sales revenues. The troubles began in 2016 and undermined Under Armour’s reputation as an up-and-coming growth company in the sports apparel business. Starting in the second-quarter of 2010 and continuing through the thirdquarter of 2016, Under Armour achieved revenue growth of 20+ percent for 26 consecutive quarters. In announcing the company’s 2016 third-quarter financial results, Chairman and chief executive officer (CEO) Kevin Plank said:1 Over the past 20 years, we have established ourselves as a premium global brand with a track record of strong financial results. Looking back over the past nine months, it has never been more evident that we are at a pivotal moment in time, where the investments we are making today will fuel our growth and drive our industry leadership position for years to come. As a growth company with an expanding global footprint and businesses like footwear and women’s each approaching a billion dollars this year, we have never been more focused on the long-term success of our Brand. But despite Plank’s optimism about Under Armour’s future prospects, he went on to announce a reduced sales and earnings outlook for the fourth quarter of 2016 and weakening demand for Under Armour products in North America. So far in 2016, UA’s quarterly revenue growth in North America over the same quarter of 2015 slowed from 25.7 percent in Q1 of 2016 to 21.5 percent in Q2 to 15.6 percent in Q3. But in January 2017, Under Armour’s report of its 2016 fourth quarter and full-year results rang louder alarm bells, despite record annual revenues of $4.8 billion for fullyear 2016, up 22 percent over 2015, and record net profits of $259 million, up 10.5 percent over 2015. There were some obvious cracks in Under Armour’s recordsetting 2016 performance: • Fourth-quarter revenues rose only 11.7 percent over fourth-quarter 2105 revenues, by far the lowest percentage fourth-quarter increase since 2010, which had ranged from a high of 35.5 percent in 2010 to a low of 25.5 percent in 2012. • Fourth-quarter 2016 income from operations dropped 6.1 percent from the same quarter a year earlier and fourth-quarter 2016 net income dropped 0.67 percent. • Fourth-quarter 2016 revenues in North America were up only 5.9 percent and operating income in North America dropped 15.0 percent. • Full-year operating income in North America dropped from $461 million in 2015 to just $411.3 million in 2016. • make matters worse, Plank said the company’s outlook for full-year 2017 was gloomy—expected revenue growth of 11 to 12 percent (the lowest annual growth rate since the company became a “C” corporation in 2002) and a $97.5 million decline in operating income to approximately $320 million, attributed mainly to “strategic investments in the company’s fastest growing businesses.”2 Nonetheless, Kevin Plank reiterated his confidence that the company’s resources and capabilities would enable it to cope with the challenges ahead:3 • are incredibly proud that in 2016, we once again posted record revenue and earnings; however, numerous challenges and disruptions in North American retail tempered our fourth quarter results. The strength of our Brand, an unparalleled connection with our consumers, and the continuation of investments in our fastest growing businesses—footwear, international and direct-to-consumer—give us great confidence in our ability to navigate the current retail environment, execute against our long-term growth strategy, and create value to our shareholders. Under Armour’s financial performance in 2017 turned out to be worse than expected. A year after growing North American sales from almost $1.0 billion in 2012 to $4.0 billion in 2016 (a compound growth rate of 41.4 percent), Under Armour’s 2017 sales in North America dropped $200 million. Total revenues worldwide were up a meager 3.1 percent; operating income dropped by $290 million to just $27.8 million; and the company reported a net loss of $48.3 million. The big drops in operating income and the net loss were partly attributable to management’s announcement in August 2017 that it would pursue a $140 to $150 million restructuring plan to address operating inefficiencies, transition to a product category management structure, and reengineer the company’s go-to-market process (product innovation and design, vendor relationships, delivery times of seasonal products, inventory management, profit margin control, and speed of response to shifting consumer preferences and market conditions). In addition, the plan called for a global workforce reduction of about 300 people, inventory reductions and write-downs, and charges for asset impairments, facility and lease terminations, and contract terminations [Show Less]