Under Armour

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Under Armour, Inc. is a global developer, marketer, and distributor of branded athletic performance apparel, footwear, and accessories.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Under Armour operates in a highly competitive industry, and therefore is having a tough time carving out a sustainable economic moat.

Moat Assessment: 2/5 Under Armour’s moat is currently weak, primarily limited by brand recognition and some distribution advantages, but these factors alone do not provide a significant sustainable competitive advantage due to a lack of clear pricing power, heavy competition and constant need to be innovative.

  • Brand Strength (Partial Moat): Under Armour has built a recognizable brand, particularly among athletes. However, the apparel market is highly competitive, and many other brands like Nike, Adidas, Lululemon are fighting for the same customer base, making it tough for Under Armour to command a significant price premium or maintain unwavering customer loyalty over a long period. Brands in apparel, including sports apparel are easily copied and tend to have shorter lifecycles. Consumers are increasingly driven by trends and changing preferences, making it difficult to create lasting brand value in this sector.
  • Distribution Advantage (Weak): While Under Armour has a solid distribution network, it is neither unique nor difficult to replicate, as almost all major apparel manufacturers have similar access to both retail and online channels, therefore the company does not have any pricing power due to this advantage.
  • Customer Switching Costs (Limited): Switching costs in apparel are very low. Consumers can easily switch to other brands based on price, fashion trends, or other factors with almost no impact. This limits Under Armour’s ability to hold onto customers.
  • Lack of Intangible Assets: While some companies might claim that patents or design rights form an intangible asset moat, there is little evidence that fashion brands can build and sustain this. As a result, any competitive advantage gained by innovation is quickly eroded by competitors, and their products quickly become commodities.

Risks to the Moat and Business Resilience:

  • Intense Competition: The athletic apparel market is highly competitive. Under Armour faces intense competition from established giants like Nike and Adidas, as well as new and innovative entrants. In such a competitive market, gaining market share is a very big challenge and is expensive due to the intense need for advertising.
  • Changing Consumer Preferences: The fashion and sports apparel industry is susceptible to changes in consumer preferences and tastes. Trends change rapidly, and companies must be very quick to adapt and innovate to remain relevant, and there is a risk of Under Armour failing to maintain its relevancy by getting its innovation cycle wrong.
  • Economic Downturns: During economic downturns, consumers tend to cut back on discretionary spending, which will have a direct negative impact on a companies like Under Armour.
  • Supply Chain Issues: The clothing industry is very reliant on a global supply chain, meaning that supply chain issues in one region can affect the company’s production and delivery of goods. Any supply chain disruption can lead to increased costs and decreased availability of products.
  • Marketing Spend: The company relies heavily on its marketing campaigns for product awareness and sales. Failing to develop a successful marketing campaign can severely impact the revenue generation of the company, which would translate to poor stock performance.

Despite these risks, Under Armour has strong brand recognition, a growing global presence, and a very strong e-commerce business, which might allow it to survive through some of these rough patches.

Business Overview Under Armour is a company that designs, markets and distributes athletic apparel, footwear, and accessories.

  • Revenue Distribution: Under Armour operates across several channels:
    • North America: This region represents the majority of the company’s revenue. The company sells its products in this region primarily through wholesale, direct-to-consumer channels.
    • International: This includes sales through distribution partners and retail locations. The expansion into other international markets is an area of opportunity for the company, which has the potential for high growth.
  • Trends in the Industry:
    • Athleisure: The market is seeing a shift towards athleisure-more versatile clothing options that can be used for both exercise and daily wear. This trend benefits both athletic brands and traditional clothing brands, as they expand their offerings to capture the market share.
    • E-Commerce: Online retail is a major force in the sportswear sector. The companies are focusing on building their presence in online channels, and those that are able to have a better and seamless online experience for customers will have an edge over others.
    • Sustainability: Consumers are increasing being more conscious of their environment, which pushes the company to manufacture ethical and sustainable products.
    • Technological Integration: Consumers are looking for technological advancements, especially in the footwear segment, as well as clothing. This segment has seen massive investment by the manufacturers in development of new technologies.

  • Margins and Profitability: Over the past decade, Under Armour has not been able to improve its margins by any substantial amount. While their operating profit has steadily increased in line with revenue growth, their operating margins haven’t improved substantially, meaning that the sales have to grow more in order for Under Armour to create more value. In Q3 2023, gross margin came in at 48.7% and operating margin was 8.2%.

  • Competitive Landscape: The athletic apparel and footwear industry is one of the most competitive industries in the world. Under Armour must compete with established giants like Nike and Adidas, fast-growing competitors like Lululemon and others like Puma, Anta, and various smaller players with niche products. These companies have a lot of money to spend on marketing and research, making it difficult for any other competitor to break their grip on the market. Also, fashion trends in apparel and footwear are constantly evolving, meaning that Under Armour has to be constantly innovative in order to keep the pace.

  • What Makes Under Armour Different: While Under Armour has a strong brand image, it isn’t necessarily different from the competition. Many companies try to make apparel that is lightweight and comfortable, Under Armour’s competitive advantage is very limited and therefore its brand value becomes negligible due to its lack of uniqueness.

Financials In-Depth

  • Revenue:
    • In the nine-month period ended September 30, 2023, Under Armour reported revenue of $4.24 billion, a 2% decrease compared to the prior year, or a 1% increase if you excluded impacts from currency and supply chain issues, and other one time items.
    • North America revenue was $2.9 billion, a 2.5% decline.
    • International revenue was $1.3 billion, an 1% increase.
    • Direct-to-consumer revenue accounted for 34% of total revenue, while the wholesale business made up the rest.
  • Gross Profit:
  • Gross profit increased to $2.07 billion, but the gross margin decreased 0.8% to 48.7%.
  • Lower than historical levels.
  • Operating Income:
    • Operating income was $335 million, or 8.2% of revenues. This is higher than in the prior year, reflecting ongoing improvements in supply chain and efficiencies.
    • This metric has been improving over the past year.
  • Net Income:
    • The net income came in at $273 million.
  • Balance Sheet:
    • Cash and cash equivalents is $1.1 billion.
    • Inventory came in at $1.4 billion.
  • Total assets was reported at $4.8 billion.
  • Total liabilities was at $3.3 billion. * Under Armour is highly leveraged, as its equity balance is just $1.5 billion.
  • Cash Flow:
  • Net cash from operations came in at $526 million.
  • Net cash spent on capital expenditures was $99 million. * Net cash used for investing activities was $79 million. * Net cash used for financing activities was $440 million.

Under Armour’s financial performance has shown mixed results, with some improvement in profitability, and a high operating expense that impacts the bottom line.

Understandability: 2/5 Under Armour’s business model is relatively straightforward, however the nuances of the sports apparel industry is not as easy to understand, along with the complicated metrics. Here’s why they have earned a low rating:

  • Product Differentiation: While Under Armour has a solid brand image, it struggles to establish any differentiation in the products they offer. This means that the stock price is mostly tied to the success of their marketing campaigns, which are very unpredictable.
  • Reliance on Marketing: The sales are very dependent on marketing spending, which can influence the numbers in the short term but has an inherent risk that marketing initiatives are not always successful and can produce low ROI on the spending.
  • Competitive Environment: The athletic apparel industry is highly competitive and it is very difficult to predict the long term prospects of a company in the industry as their moat is generally quite weak.
  • Financial Complexity: Reconciling various data to form a valuation requires an in-depth knowledge of accounting and finance, since many times what is reported in the financial statements do not reflect the realities of the business.

Balance Sheet Health: 3/5

Under Armour’s balance sheet is decent but has its share of negatives. Here’s a breakdown:

  • Adequate Liquidity: The company has a fairly strong cash position, which provides a buffer against financial shocks. The current assets are greater than the liabilities. The company has the capacity to keep going even with unforeseen circumstances.

  • High Debt Levels: The company has substantial debt compared to equity, which can prove detrimental in case of a financial downturn or any other unforeseen circumstances. A lot of the debt they have is in long-term debt, meaning that they must dedicate a sizable portion of their profits to just make debt repayments, and it is not being put to productive purposes.

  • Inventory Risk: While the company has shown that they have enough stock for the current sales, a significant amount of the total assets consist of inventory. Since athletic apparel can quickly fall out of fashion or go out of season, there is a risk for write-offs and subsequent losses.

Overall, while Under Armour is not necessarily financially unstable, it is also not in the best financial shape it could be and it carries a higher risk profile.

Recent Issues & Management Outlook: Under Armour has faced its fair share of controversies and problems, which included high inventory levels, a decline in its market share, higher operating costs, and a negative outlook for upcoming earnings, but they are working hard to come back from the slump that it has faced in recent times.

  • Inventory Issues: Under Armour has been struggling with high levels of inventory in recent times and they have been forced to reduce it. This is a sign of over-reliance of its previous business model and has created concerns about the pricing power of the company. Management has indicated that they are working hard to bring these to more reasonable levels and that they have reduced excess inventory by 15% YoY.
  • Market Share Losses: The company has been losing market share to its competitors. The management is working hard to bring back the growth but they acknowledge that this is going to be a long process. They are working to create unique and innovative products to give themselves an edge over the competition.
  • Management Stability: The management team has seen a lot of reshuffling in recent times. Although the new leadership is trying hard to bring about significant changes, this could add additional challenges in the long term, as they try to adjust to their role, and try to lead the company forward.
  • Restructuring: The company has started restructuring its operations, including laying off some of its employees and reducing marketing spending. While they might be able to save costs, this can affect long term growth and revenue. They have stated that they will start a 3-year transformation strategy which will bring the business to its former levels.
  • Underperforming stock price: Even with strong management plans, the stock price has been underperforming. The investors are unsure about the long term prospects of the company, which makes them wary to put their money behind it. Management is working hard to turn the tide around.
  • Future Outlook: Management expects revenue for FY24 to remain stable and profit margins are expected to improve. They are working to improve sales, reduce costs, and bring in new innovative products. They are also focusing on inventory management and improving supply chain issues.

While Under Armour is facing some major headwinds, the management is working hard to bring back the company to its former levels and investors have to carefully watch the company over the next few quarters, to understand whether their restructuring strategy has any legs.