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Under Armour Business Strategy Project

Class 18
Group Members: Francesco Barbuti, Niccol Colussi, Anastasia Concetti, Nicol Dubini, Laia Marin
Sola, Dimitar Panchev

May 3, 2016
Overview and
Performance Environment Sustainability Conclusions
Opportunity

Firm Overview and History


Under Armour is a global leader in performance apparel, footwear, and accessories,
together with Nike and Adidas.

First TV commercial Internationalization


New clothing lines Deal with Tottenham Hotspur
Founded by Kevin Plank
$281 million revenues Launch of Armour39
Innovative fabrics
2005: went public

1996-1998 2002-2005 2011-2015

1999-2001 2006-2010 Next 5


Years
Supplier for Any Given Sunday Entered the football business Opportunity: opening of branded
First ad campaign Deals with world-class athletes retail stores in Europe
Deals with MLB and NHL First branded retail in Annapolis
2010: > $1 billion revenues

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Overview and
Performance Environment Sustainability Conclusions
Opportunity

Opportunity
Currently products are primarily sold in Europe through wholesale distributors, online
stores and independent retailers
Products are now distributed to retail customers and e-commerce consumers in Europe
through a third-party logistics provider based out of Venlo (NL); this agreement
continues through April 2017
The opportunity we propose is the opening of Under Armour branded retail stores in
Europe, through a downstream vertical integration, creating a direct distribution channel
in the area
In particular, UA would strengthen its competitive position both by improving the
efficiency of its cost structure and by contributing to brand awareness
Potential increase in revenues as well as improvement in inventory turnover

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Overview and
Performance Environment Sustainability Conclusions
Opportunity

Stock Performance
Much smaller market cap than main Market Cap
industry competitors 120.00
98.62
Considerably higher stock price growth 100.00
(~ 400% total cumulative return over last 5 80.00
years) 60.00
The firm has never paid dividends and 40.00 26.97
plans to retain all earnings in the 20.00 9.71
foreseeable future for use in its business
0.00
Under Armour Adidas Nike
*Amounts in USD billions
Stock Price % Growth
700.00%

600.00%

500.00%

400.00% UA
Nike
300.00%
Adidas
200.00%

100.00%

0.00%
2011 2012 2013 2014 2015 2016 4
Overview and
Performance Environment Sustainability Conclusions
Opportunity

Financial Performance
In the last 5 years UA has performed quite well, exceeding industrys ROE and ROA
measures
It has revenues with strong 30% YoY growth on average for the last 5 years
On average, Under Armour has outperformed the industry in terms of both liquidity and
efficiency with slightly higher Acc. Receivables Turnover and Current Ratio
However UA has lower gross, operating and profit margins than the industry median:
o Much higher tax rate
o High marketing expenditures
o Possibly hasnt exploited economies of scales to such an extent yet
Revenue and Growth
4,500.0 45.0%
4,000.0 40.0% Industry
3,500.0 35.0%
Median 2015 2014 2013 2012 2011
Quick
3,000.0 30.0% Ratio 1.72 1.49 2.40 1.55 2.32 1.99
2,500.0 25.0% Current
Ratio 2.88 3.13 3.67 2.65 3.58 3.76
2,000.0 20.0%
A/R
1,500.0 15.0% Turnover 9.7 11.1 12.6 12.1 11.9 12.5
1,000.0 10.0%
ROE 15.4% 15.4% 17.3% 17.4% 17.7% 17.1%
500.0 5.0%
10.3% 8.1% 11.3% 11.9% 12.4% 12.2%
0.0 0.0% ROA
2011 2012 2013 2014 2015

Revenue YoY Growth


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Overview and
Performance Environment Sustainability Conclusions
Opportunity

Cash and Inventory


Under Armour had a strong cash position as a percentage of total assets, in comparison
to its main competitors
In 2015 cash has been reduced by two acquisitions, totaling ~500 millions
However the firm can still count on a solid cash flow generation potential
The firm has consistently maintained a higher level of inventory relative to total assets,
compared to industry peers
The high inventory volumes in both relative and absolute terms reduce the free cash
flow available to the company
Opening new shops will allow for better inventory turnover and reduction of assets that
do not produce value for the company
Inventory as % of TA Cash as % of TA
40.00% 40.00%

35.00% 35.00%

30.00% 30.00%

25.00% 25.00%
Nike Nike*
20.00% 20.00%
Adidas Under Armour
15.00% Under Armour 15.00% Adidas*

10.00% 10.00%

5.00% 5.00%

0.00% 0.00%
2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 6
*Includes also short-term investments
Overview and
Performance Environment Sustainability Conclusions
Opportunity

Performance by Segment
Only ~10% of revenues comes from outside North America high potential for growth in
other geographic segments
143 number of shops UA operates directly vs. 460 shops industry median (as of 2015)
No brand houses in Europe
Revenues by Geographic Segment
4000
3500
3000
2500
2000
1500
1000
500
0
2011 2012 2013 2014 2015

North America Other Foreign Connected Fitness


Amounts in USD millions

UA UA (%) Nike Nike (%) Adidas Adidas (%)


North America 3.46 87.37% 13.74 44.90% 3.15 16.27%
Europe 7.10 23.20% 5.20 26.86%
0.50 12.63%
Rest of the World 9.76 31.90% 11.01 56.87%
TOTAL 3.96 100% 30.60 100% 19.36 100%
As of December 2015; amounts in USD billions

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Overview and
Performance Environment Sustainability Conclusions
Opportunity

Industry Life Cycle


Under Armour competes in the sportswear industry and specifically in the
performance sportswear niche
The sportswear industry is considered a mature one, but the performance niche is still
in a growth phase
This growth is backed by increasing fitness awareness and evolving technology
To maintain its competitive position in the industry, Under Armour should stay loyal to
its values of going beyond its limits in terms of innovation and vertically integrate the
distribution process
Sales

Time
Introduction Growth Maturity Decline
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Overview and
Performance Environment Sustainability Conclusions
Opportunity

Porters Five Forces Analysis


Bargaining power of
suppliers
Threat of new entrants MEDIUM
MEDIUM Suppliers may
Low switching cost
increase price or
Brand Value and
reduce quality
Innovation Industry Rivalry
differentiate the Larger companies
HIGH can obtain cheaper
products Large and
High cost of raw material
established
marketing and R&D Bargaining power of
competitors with
to compete with customers
similar products at
incumbents HIGH
similar prices
Competitors with Price sensitive
strong influence and customers with low
better international switching cost
penetration Products with
Threat of substitutes similar
LOW characteristics
There are no direct Large wholesale
substitutes distributors can
demand lower
prices
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Overview and
Performance Environment Sustainability Conclusions
Opportunity

Financial feasibility
From a financial standpoint, UA has a strong enough balance sheet to successfully
establish directly operated stores in Europe
In particular the firms high cash balance and steep revenue growth, can guarantee the
necessary resources to sustain the long-term feasibility of the strategy

Main challenges
High level of competition in European market from Nike, Adidas and other strong
competitors, currently dominating the direct sale channel
Sunk costs due to considerable investments in fixed assets

Benefits Costs
Difficult to develop and integrate sales
Better coordination (time to market)
capabilities on a larger scale
Difficult to manage strategically different
Better control on distribution process
distribution channels

Cost efficiency (scale & scope economies) Lack of flexibility

Strategic independence High investments in fixed assets

Avoid transaction costs with retailers

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Overview and
Performance Environment Sustainability Conclusions
Opportunity

Levers for Sustainability of Competitive Advantage

Strong brand loyalty and image Superior innovation and design


Will be improved by new shops Requires continuous innovation
to maintain technological
Advertising
superiority
Sponsorship Easy to sustain: part of core
Competitive
Unique corporate culture Advantage competences

Understanding customers needs


Superior product performance
Valuable and hard to imitate
Difficult to defend: no patents

Target of niche market


Focus on the performance niche of the
sportswear industry
Entry by big players might pose
challenges

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Overview and
Performance Environment Sustainability Conclusions
Opportunity

Conclusions and Recommendations


After our analysis, we can recommend Under Armour to pursue this opportunity, in order to
Gain competitive advantage
o Strengthen brand awareness and product differentiation
o Increase cost efficiency
o Manage inventories more efficiently
Improve growth prospects
o Sales
o Market value
Achieve geographic diversification
Increase market share

Moreover, based on the fundamentals considered, we believe the company could


potentially represent a good investment choice.

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References
2015 Under Armour Annual Report
2015 Nike Annual Report
2015 Adidas Annual Report
Thomson Reuters Eikon 4
Giarratana M. (2016). Strategy Notes. Milano: Egea.

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