Izak Jacob Held
Project: (ECO/MBA 5500, Grade Received: A)
Economic Prosperity At Under Armour
Under Armour has taken the apparel industry by surprise just a few years ago. No one would have bet that a new company could penetrate an industry dominated by just a handful of brands, in the short time it did. With inventory more expensive than ever and financial obligations that are on the rise, this industry has economic challenges that it will hit going forward. Through the financial statements and company documents we have obtained the proper literature, sources and references that will suite the economic information to better understand Under Armour’s economic position.
In This paper we will analyze the exuberance of the famous retailing company, Under Armour. Their platform concentrates on the business of sports clothing and how it concentrates its resources to its economic productivity. From the evaluation of the company’s financial statements, it can be determined if the financial position of Under Armour holds economic prosperity.
In Under Armour’s annual report the chief executive officer expressed the following comments in the letter from the CEO. “We've posted strong results on our scoreboard highlighted by 30% average topline growth and 23 consecutive quarters of 20+% net revenue growth this ongoing net revenue streak is something we are especially proud of given that we are one of only two companies that can make this claim in the S&P 500” (Under Armour, 2016). A company that trades in the stock market puts their financial well-being largely into hands of trading and the futures of the market. And for Under Armour to outperform almost the entire S&P 500 is itself an enamored success of achievement that this company has created.
A New Economic Position
Under Armour is currently one of the largest sports brand clothing companies in America. Born in 2006 in Maryland, USA, Under Armour provides products related to casual and sportswear apparel in the sports industry. Perhaps the most exciting news that this company has produced is the success they have had with Stephan Curry the most valuable player (MVP) of the National Basketball Association (NBA), whom they have under brand endorsement. An endorsement that the company will have forever enjoyed.
Business Insider writes on UA’s signing of Curry “In the second quarter of 2015, during the same time frame when Curry won MVP and the Warriors won the title, Under Armour's basketball shoe sales went bonkers with sales growing by 754% in that category.” (Davis, 2015). The data that is extracted from the analytics of endorsement to financial gain’s is excessive and has every large company on the bandwagon to increase their portfolio of players through this manner. This has gone from a marketing and branding aesthetic to an economic intricacy, something that has not existed in commercial apparel before and is relatively new going back 30 to 35 years.
These endorsements are one of the biggest assets that a company in this business can hold. Sports player endorsements with world famous players furthers Under Armour’s economic efficiency. Curry is a player in the NBA and was one of the first big stars to come out with the company turning down Nike, Adidas and the other big brands. Under Armour has grown and currently has a presence in so many sectors and industries throughout the world including China, Canada and Scotland. The economic and financial statements of Under Armour have shown us plenty of success that it has had in its years from start up through to one of the top and leading clothing apparel companies in the United States of America and with these all star player signings, it is a notoriety of what Under Armour has become.
Economic Outlook & Perspectives
The economic status of Under Armour shows plenty of revenue and financial reporting positivity. For example, Under Armour had earned contracts of $250 million in the prior financial statements from a deal with endorsements of players. (Under Armour, 2016). Prior to that in 2014 for Under Armour procured deals with athletic equipment’s and products, more innovation for the business which is something that is outside the clothing scale. Innovation procreated like this is what investors are analyzing when looking for economic success.
Additional endeavors include a $450 million deal that the company had tied up with a nutrition and calorie app maker called My Fitness Pal in the prior financial statement year of 2015. With multiple deals of an additional $85 million for a fitness company, as well as a better deal which includes becoming a partner with University of California at Los Angeles of a $280 million deal, just last year. This was a great contract as it is for an upcoming 15 years, not just a short stint. This concludes that revenue has grown steadily and Under Armour has procured the core of the right economic factors to keep its financial well-being maintain. (Under Armour, 2016).
Getting more into the finances and economic statistics, revenues have risen by over 30% from 2015 to 2016. Current year in United States alone holds and encompasses a large part of this with over $1 billion and recently worth you are in the United States of 3.96 billion from a 20% increase from price hikes. (UNDER ARMOUR, INC., 2015). Largely because of its apparel and recent footwear brands.
In the first quarter of 2016 financial outlook has also been tremendous for the apparel company. Net revenue outlook is now projected to be $5 Billion, this is a continuous trend for the company of another growth peak and in this quarter a 30% increase alone. (UNDER ARMOUR, INC., 2015).
One of the More invigorating strategic plans that have pushed Under Armour was expanding into other markets asides from sports apparel. This was a major competitive edge that they created from rivals Nike and Adidas. Such as casual apparel, equipment, technology and contracts with colleges and universities and of course the sports endorsements including the popular sports players Stephen Curry and Kevin Durant of the national basketball Association.
Procuring Their Economics
This is the right position for Under Armour to have considering what the Journal of Economic Perspectives positions on how the industries are changing. “The past 15-20 years have seen substantial and visible changes in the way US retail business is conducted. Explanations about what is happening in the retail sector have been dominated by two powerful and not fully consistent narratives: a prediction that retail sales will migrate online and physical retail will be virtually extinguished, and a prediction that future shoppers will almost all be heading to giant physical stores like warehouse clubs and supercenters.” (Hortaçsu, 2015). From the Professors Ali Hortacsu and Chad Syverson we see how their research is pertinent to what a company like Under Armour needs to achieve.
Interestingly enough the Journal gives adequate take on financial opportunities that lie for commercial retail companies like Under Armour. Because the United States, one of the leading sectors of countries for Under Armour, has maximized in its services line, there is now growth an expansion waiting in the retail industry. “Goods consumption as a share of the economy has seen a long-run decline. But relative to total goods consumption, retail has not been shrinking over the long run. In 1954, retail value added equaled 21.7 percent of the value added of the private goods-producing sectors… In 2014, this share was about 24 percent, though it has fallen from a peak of 29 percent in the late 1990s.” (Hortaçsu, 2015). What Under Armour has professed, was even in these economic conditions they have gotten as far as a top performing company.
Debt handling for Under Armour has been something the company is taking an advantageous position on. Debt is bad, but not all debt is bad, there is debt in economics that we learn are good such as education and property ownership. Here for Under Armour debt is cheap and they are taking advantage of it in an amiable way.
There have been some casualties with their pegged foreign currencies but this is very common for a retailer at such as size like the UA brand has. With Under Armour expanding into Europe and China cash outflows to this repertoire are a positive move that are read from the company’s standpoint. Remember that cash outflows from investments such as equipment, franchising and generally anything growth related are the economic signs investors are looking for. Under Armour has financed a tremendous amount of liquidity because of needs in part from borrowings that were taken advantage of through their fantastic credit facility. The credit agreement contains negative covenants that, subject to significant exceptions limit our ability,
among other things to incur additional indebtedness
Sources of risk or uncertainty in this business of retail lies in its merchandising. There is tremendous risk for taking too much of it on and at the same time there are no good investment analyses that would find this attractive. In any business with this intensity and size there are government regulations that have affected this company's operations domestically and abroad. NAFTA, the European Union and of course general considerations of government tariffs and embargoes. Companies overcome this economic tumultuous issues of big government and unfair rules for business by hiring a director of government relations.
From a job description on the Under Armour website claims “The position is responsible for developing and implementing Under Armour's government relations strategy and initiatives at the federal, state and local levels on issues that are relevant to the company's vision, mission and goals. Reports to the company's SVP General Counsel. Key Responsibilities Serve as the chief lobbyist and government relations advisor for the company on legislative, regulatory and policy issues at the federal, state and local levels.” (Under Armour, 2016). They have clearly hammered this issue by lobbying and dealing with their outside economic endeavors efficiently. For a company the size of Under Armour it is of no shock that they have governmental outreach and lobbying of this size.
Tying The Matters
The inputs that are used in this company's production function and ancillary challenges to securing these inputs are as follows. Efficiency in Under Armour’s inputs determines if the company will continue in ongoing efficient productions. Like mentioned earlier Under Armour has introduced new products in existing markets as well as expanded their markets tremendously created new markets over time. Specifically, they are tremendously ramping up their women’s apparel line which is an industry that keeps up quite the promise as feminism takes popularity.
This study finds that there is efficiency in convergence analysis for clothing and apparel of women in the retail and store chains. “Estimate[d] retailing efficiency in a 26-store women clothing retail chain and to decompose it in several measures in order to contribute to the performance improvement of this retail service firm, as well as to compare the efficiency of the different decision making units.” (Xavier, 2015). One thing was clear from this paper, in which there is major financial gains to be earned when investing in the women’s apparel. Under Armour takes this endeavor with such precision that they proclaim they are in the business of retail to advance men, women and youth activities through a comfort of wearing essentials.
One of the most challenging aspects of Under Armour is not in their diversity of gender, it is in their founding signature of the microfiber garment’s that they put into all of their clothing. For comfortable sportswear and apparel, they have brought a new industry in in itself that can be depicted as utilities for the sports player. This cloth does more than trend and stay fashionable, it gives the athlete that moisture and aesthetic feeling that a regular t shirt cannot give, and at worst makes uncomfortable. These are good signs for the demand elasticity for its products and while the availability of close substitutes for many of its products are simply scarce, a competitive advantage for Under Armour.
So with all this expansion and opportunity what exactly is the furthering impact on Under Armour’s finances? Because like we said earlier that they are the dominant presence for the microfiber material the company determines the price of its products at a monopolistic perspective. This has given them tremendous financial leverage, but this still holds as a pertinent matter being that Under Armour is internationally operating. Revenues and expenses are recognized under different accounting and reporting frameworks where translational gains and losses still fluctuate from currency adjustments daily. In the annual report Under Armour reports that “as a result, foreign currency exchange rate fluctuations may adversely impact our results of operations.” (Under Armour, 2016).
Markets and Projections
Increases and declines are projected as over time analyses gives reasons for price fluctuations. Designations and sponsorships are becoming more and more expensive for all suppliers to handle as the internet sells more and small business gains lead in attraction. Needless to say but this has become quite the trend of sports apparel in the 21st century.
Under Armour either way wants to keep its brand image at the least amount of cost it can. This truly conforms to long term arrangement that the company has shown they are controlling. However, there still lies a stagnant long term debt through finance and leasing capital investments. One matter that Under Armour has procured with long term debt are the interest rates that they bare. Weighted average for these rates on the company’s outstanding obligations to pay are from 3.1% to 3.3% during the past 3 years (since 2013).
Threats & Competition
As we have outlined, internal matters for economic stability are fair. But there are outside factors that can affect pricing decisions. Asides from government affairs and regulations that we analyzed earlier, determinacies of economics are vulnerable in technology development, political endeavors and the health of an economy all together. The company's profitability is at stake and Under Armour has successfully identified industry influences on its costs, operations, and profitability. The company has outlined sufficiently, what factors deem liable to decimate a forecast of inventory and revenue production throughout their future. These include “an increase or decrease in consumer demand for our products; our failure to accurately forecast consumer acceptance for our new products; product introductions by competitors; unanticipated changes in general market conditions or other factors, which may result in cancellations of advance orders or a reduction or increase in the rate of reorders placed by retailers.” (Under Armour, 2016).
The competitive environment for Under Armour consists of large worldwide sports apparel companies that sell footwear and athletic merchandise. Nike and Adidas as they have pointed out in their financial report. The performance of these alternative and substitute brands still weighs heavy, but the fabrics, technology and processes that Under Armour leverages can be overcome with superseding product. To add to the competition in which the firm operates, they also manufacture their own specialties, private labels and distribution in certain market share. The strategic behavior of the firm and its competitors are transparent and have a symbiotic relationship amongst each other and the sporting industry.
To combat these threats Under Armour has identified and controlled operational risk, through their brands identity that has reduced reputational risk factors as well. But one thing is certain, fashion risk still stays on board and at a changing moment the company may have to follow and that’s when they may not be able to lead again.
Tying The Financials
The short run of the company needs to be stretch as long as it can to consider the variation of Under Armour’s fixed inputs. Long run would not consider technological variations considered, but being that Under Armour entered into the market through a technological advancement in their microfiber science it needs to be included. “Short-run business cycle fluctuations, assigns a low value to this parameter. The international trade literature, which is more concerned with long-run changes in trade flows following a change in relative prices, assigns a high value to this parameter.” (Crucini, 2016). Thus it is imperative that Under Armour keeps it short run in a transparent manner.
Under Armour has shown a revolution of what a company can strive to be through a uniform code of service. Their fortitude has stretched their net revenues from 2011 as a $1.4 billion dollars gross; to a $3.9 billion in 2015. Their net revenue by product category is dominantly in apparel. Today approximately 70% of their business is in apparel, 17% is in footwear and accessories are in 8%. Interestingly enough as hot as their products are, their licensing is stagnant at just over 2%.
When will the next takeover be? In the early 2000’s someone asked you do you think Nike has viable competition, an investor would deem him looney. There is traced economic sufficiency for Under Armour that has been shown in this article through the financials and journal based studies about their economic positions.
They are expecting more global expansion and continuous increases to their e-commerce platform. With 25 global website shops and nearly 200 Under Armour owned retail stores around the world the company is completely positive for their road ahead to be successful. Under Armour stole the show and now with their brand endorsements from MVP players growing, they can be the champion or converse of the 80’s and 90’s, just another company that peaked.
Baye, M. R., & Prince, J. T. (2014). Managerial Economics and Business Strategy. Boston, MA: 8ed., McGraw Hill. ISBN: 978-0-07-352324-4.
Crucini, M. J. (2016). Distribution capital and the short- and long-run import demand elasticity. Journal Of International Economics, 100203-219. doi:10.1016/j.jinteco.2016.03.010. Retrieved from http://proxygsu-sho1.galileo.usg.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=edselp&AN=S0022199616300459&site=eds-live&scope=site
Davis, S. (2015, 8 3). Stephen Curry's shoe deal with Under Armour is a total steal. Business Insider, pp. http://www.businessinsider.com/stephen-curry-shoe-deal-under-armour-2015-8.
EDGAR, Securities and Exchange Commission. (2012). Under Armour, Inc. Retrieved from Edgar: https://www.sec.gov/cgi-bin/browse-edgar?CIK=UA&owner=exclude&action=getcompany&Find=Search
Hortaçsu, A. &. (2015). The Ongoing Evolution of US Retail: A Format Tug-of-War†. Journal Of Economic Perspectives, 29(4), 89-112. doi:10.1257/jep.29.4.89. Retrieved from http://eds.a.ebscohost.com.proxygsu-sho1.galileo.usg.edu/eds/detail/detail?sid=bcf3340e-3654-41c9-bc3f-c1eb6dacfcaf%40sessionmgr4001&vid=0&hid=4202&bdata=JnNpdGU9ZWRzLWxpdmUmc2NvcGU9c2l0ZQ%3d%3d#AN=110755188&db=bth
Under Armour. (2016). Annual Report for UA. Retrieved from UA.com: http://files.shareholder.com/downloads/UARM/2094468886x0x880876/7D1585BA-87FA-4E66-93D3-6C17B3A57B1E/10-K_pef.pdf
UNDER ARMOUR, INC. (2015, 13 31). Form 10-K. Retrieved from United States Securities and Exchange Commission: https://www.sec.gov/Archives/edgar/data/1336917/000133691716000064/ua-20151231x10k.htm
Xavier, J. M. (2015). Efficiency and convergence analysis in a women’s clothing retail store chain. . International Journal Of Retail & Distribution Management, 43(9), 796. doi:10.1108/IJRDM-06-2014-0077.
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