under armour financial analysis case study

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Under Armour

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• | Language: English
• | Pages: 27

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Rory M. McDonald

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• December 2019 (Revised April 2021)
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Under Armour Settles with the SEC

By: Mitchell Stein, Vaughan S. Radcliffe, David Booth

In May 2021, a recent graduate from the master of business administration program at Ivey Business School noticed a news article about one of his investments, the leading athletic apparel company…

• Length: 15 page(s)
• Publication Date: Feb 22, 2022
• Discipline: Accounting
• Product #: W27293-PDF-ENG

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In May 2021, a recent graduate from the master of business administration program at Ivey Business School noticed a news article about one of his investments, the leading athletic apparel company Under Armour, Inc. The article stated that Under Armour, Inc. was fined US$9 Million by the US Security and Exchange Commission. The charges were a result of concerns over the company's revenue reporting practices, but the company's share price dropped only very slightly following the announcement. The investor was considering his options regarding his investment. However, he was still curious and eager to learn more about the circumstances behind the US Security and Exchange Commission's charge and potential consequences for the company. The investor decided to examine Under Armour, Inc.'s revenue reporting practices, financial reporting practices, and corporate governance issues.

Mitchell Stein is affiliated with Ivey Business School. Vaughan S. Radcliffe is affiliated with Ivey Business School.

Learning Objectives

This case can be used in early financial accounting courses at the undergraduate or graduate level. For most classes, this case should be introduced after students have attained a basic understanding of generally accepted accounting principles, are comfortable with basic accounting standards and concepts (specifically, revenue recognition), and have a general sense of management's responsibility over financial statements. After completion of this case, students will be able to understand the importance of adequate financial reporting disclosures in revenue reporting and the fair presentation of a company's current and future financial performance; gain exposure to reporting requirements around the recognition of revenue for public companies; understand the impact that the failure to disclose material financial information in the reporting of revenue may have on the users of a company's financial statements; and learn about concepts surrounding governance, control within organizations, and management's privilege of having access to material non-public information.

Feb 22, 2022

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United States

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Retail trade

Ivey Publishing

W27293-PDF-ENG

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Under Armour Company’s Strategic Challenges Case Study

Introduction.

Under Armour is one of the many companies that have seen its inception and growth through athletic events. Under Armour found its inception with the sole aim to improve the athletes’ performance by promoting the participation conditions of the athletes in all weather conditions. The aim was achieved through innovative measures of tailor-made athletic products of various athletic events inform of apparel, footwear, and accessories to promote the body conditions and enhance performance. These tailored products are an alternative to the old athletic gears. They include various products for male and female, old and youth athletes, and all end users involved in sporting and recreational activities. The overall activities involve designing branded products with the company’s logo, marketing, distribution, and athletic wear to various sports individuals and organizations.

Marketing activities include sponsorship agreements with colleges and professional sports institutions to support a sporting event and sell the athletic garments to individual athletes and team managers. This marketing approach promotes product and brand awareness on field sports audiences and new global markets through television coverage, enhancing market penetration and expansion. Individual athletes’ sponsorship poses a great challenge to the company’s financial planning and budgeting as performance-based agreements. However, several other foreseen challenges hinder the company’s expansion that includes the famous Brexit affecting the European countries as new policies will be put in place to regulate business activities plus entrance, expansion, and tax levy. The competitive edge posed by other companies providing competing products with bigger market share and financial strength that include Nike and Addidas adds to expansion challenges affecting Under Armour. Despite these challenges, the foreign market remains one of the unexploited markets that gives great hope for exploiting and expanding market share.

Strategic Issue

Under Armour enjoys the identical brand recognition of its athletic garments locally in North America and gaining gradual penetration to Japan, China, and European countries. The objective to earn over $4 billion from the sale of the company’s product is the chief strength for the company’s growth with the current localized market share of over 90% of sales in North America alone. The company’s revenue position of over $1,834,921 provides financial strength to support marketing, brand, and product promotion in existing and new markets. Moreover, distribution channels in the form of factory outlets, company websites, and specialty stores for the diverse sports and recreational activities garments in different market segments bolster its revenue and market share. Additionally, licensing agreements with other firms and advertisements through television programs, catalogs, online and social media promote consumer demand, expand target market segments, and increase revenue income.

Various challenges hinder the growth and expansion of the Under Armour. Competition from established market-leading companies such as Nike and Adidas is a threat to the company’s expansion and market penetration. The extra financial cost that cuts into the net revenue is required to market and advertise the products and company brand, including sponsorship programs to different individual athletes, sports organizations, and sporting events. Sponsoring individual athletes’ cost has an added constraint in financial planning as agreements are performance-based and cannot provide a robust position to make a future forecast of the company’s marketing and expenditure cost. Moreover, the cost of funding the designing of retail outlets in different market segments to promote the company’s retail consumer store product adds to the financial burden. Therefore, the strategic issue is, ‘What tactical business steps should the company take to break these growth challenges and increase its market share?’

External Environment

In an organization, the external environment comprises the immediate competitive environment and the extensive environmental factors. The immediate competitive environment refers to factors such as economic, market, and competitor forces that dictate the industries’ opportunities, profits, and expansion. The Macro-environment factors include political, economic, social, cultural, technology, environmental factors, and legal policies that direct its objectives, strategy, and direction of operation. In the sports, attire manufacturing industries, sporting, and recreational activities are factors of the external environment that support the industry’s existence and growth.

The relevance of the political factors involves the decision by states, countries, or governing bodies to hold a sport or recreational event in a certain geographical location. A change in the political environment such as Europe Brexit leads to new terms in the business environment that may include a change of trading conditions, inflation, and currency that negatively affect the industry’s income revenue. The negative impact on the economic conditions affects the buyers’ buying potential and subsequently reduces the profit margin hindering growth and expansion. Additionally, political influences by governing bodies on sponsorship of sports or recreational events limit companies’ competition and subsequently affect growth and expansion of an industry.

The shifting socio-cultural needs of sports, recreational activities, and healthcare awareness by the rising population adjust the manufacturers’ flexibility to meet the changing consumer markets. Incorporating technology to support sales, research, and product development to meet the dynamic customer behaviors promotes industry growth. Combining the two factors heightens the competition between local and established industry firms that manufacture various quality performance products to meet the market demand. The heightened competition forces companies to take strategically costly steps to cut on market share or face market fall-out.

Environmental and legal factors influence the sporting events within a given geographical location. Various climate conditions widen the sports and recreational activities of a population and diversify customer needs. Developed countries have strict legal policies aimed at protecting its citizens and the county’s economic position by regulating local and foreign companies’ business operations. Companies must comply with the regulations that involve local and global rivalry to gain market penetration before engaging in any business activity to promote their brand name and boost its business activities.

Porter’s Five Forces Analysis

The five forces analysis provides important economic market characteristics of various products that shape the strategic direction of Under Armour and subsequently influence the growth of the industry. The analysis offers knowledge on market size given the geographical locations, the existing demand and supply forces, competitive forces, and the technological shift that offer business growth and expansion opportunities. Buyer bargaining power influences the degree of sales, profit potential, and the overall growth of a company in a given target market. Companies promote brand awareness and customer loyalty through several advertisements and promotional efforts to claim a significant market niche with a considerable impact on the companies’ profit margin. Sponsorship programs in the sports industry promote sales through buyer brand identification and restrict competition from new entrants and small companies such as global market penetration by Under Armour already dominated by Nike and Adidas.

The diversity of sports activities influences product quality in any given industry. The presence of substitute products with superior quality promotes competition between manufacturing industries to control buyers’ tastes and needs. In the sports industry, athletic and leisure shoe, apparel and sports equipment companies provide substitute products, influence product price, and increase advertisement and promotions cost that subsequently decrease income revenue and threaten growth. Sponsorship and athlete endorsement lowers the seller bargaining power as there is high customer switching cost to sponsoring companies. The industry competition from the new entrants is thus limited due to the sponsorship and promotion barriers by large-scale operators such as Nike, causing high investment requirements from new companies. The rivalry is due to the need to improve market standing and business performance by the existing companies, fear of being faced-out, or overtaken in the otherwise slow-growing industry.

Key Success Factors

Sponsorship and endorsement programs, coupled with the provision of highly designed performance products, promote customer satisfaction and loyalty despite being costly. The growth of technological know-how such as online and social media amongst the world population, specifically in the developed countries and the youth with various ways to access the global market, proves to be a good solution for market penetration. Companies must gain their competitive advantage by incorporating these factors with a quick delivery process to meet these customers’ needs to promote their market relevance.

Industry Profile and Attractiveness

Despite the great political influence, dynamic legal regulations, and the economic instability in several markets due to inflation, the sports industry remains the most attractive to the incumbent investors with high projected growth and expansion due to the population’s shifting ecological needs. The healthcare awareness, changing recreational activities and the rapid technological growth provide a need for product diversity, increased revenue and growth in the industry

Company Situation

In the earlier years of its life, Under Armour experienced a milestone in marketing, brand promotion, and sales growth that positively influenced its revenue income and local market penetration. Licensing agreements, college, high school, and professional athletes’ sponsorship and endorsements proved to accelerate market penetration and the company’s growth rate improving the sales revenues every year. The company aims to provide highly designed quality performance apparel, footwear, and accessories that provided a competitive advantage over rival and substitute products. Under Armour established its competitive edge by expanding its selling units to retail customers, online markets, the opening of factory outlets, and specialty stores. The expansion provided promotional marketing and customer service touch that improved brand recognition and customer satisfaction.

Under Armour realized the highest increase in percentage growth of net sales in the year 2011 with a characteristic fall in sales growth rate in 2012(Table1). Nike enjoyed total sales of $20.9 billion in fiscal 2011, with a huge sales increase of $3.2 billion to hit a total of $24.1 billion in 2012. The great margin of total sales between the two competing companies informs that there is a great space for growth and expansion of the industry. Nike’s huge sales growth of $3.2 billion in 2012 provides a clear indication that much of the industry’s market is untapped and needs exploitation as the sports and recreational industry is still in the growth phase of its life cycle.

Financial Analysis

The analysis of the financial data indicates that Under Armour has had a good financial position with an ability to meet its liability obligations that had continually grown each year. As shown in Table 1 (Appendix), the profitability ratio of gross profit margin stagnated at about 48%, which means that there was no significant growth in revenues. However, profitability ratios indicate that the benefits have increased from 2008 through 2012. Specifically, profit margin, return on assets, and return on equity have increased from 5.27% to 7.02%, 7.84% to 11.13%, and 11.55% to 15.76%. Liquidity ratios indicate that the liquidity of Under Armour fluctuated across the five-year duration (Table 2).

In 2008 through 2012, the quick acid ratios were 2.24, 9.26, 12.79, 2.26, and 5.52 respectively. Working capital ratios for 2008 through 2012 were 10.69, 26.98, 42.36, 11.83, and 18.70 correspondingly. Leverage ratios of Under Armour are less than one. Evidently, debt ratios of Under Armour are 0.094, 0.037, 0.024, 0.085, and 0.053 for 2008 through to 2012. Debt to equity ratios of the same period are 0.14, 0.005, 0.03, 0.12, and 0.08 while equity ratios are 0.68, 0.73, 0.74, 0.69, and 0.71 (Table 3). In the aspect of activity ratios, inventory turnover has 2.04, 3.01, 2.48, 2.34, and 2.99 for 2008 through 2012 respectively.

The financial analysis indicates that Under Armour has robust financial status, which would enable it to grow and develop in competitive markets. Under Armour has a profit margin of about 6%, Nike has about 24%, and Adidas has about 4.8%. Profit margin shows that Under Armour ranks second in profitability performance. Liquidity ratios such as quick ratio and working capital ratio reveal that Under Armour can pay its liabilities at any instance. Under Armour has leverage ratios of less than one, it shows that its debts are significantly low and within acceptable financial levels. The activity ratio of inventory turnover shows that Under Armour is active for its inventory has a turnover of two or three times. Therefore, the overall financial status of Under Armour indicates that it can grow its sales and augment profits.

SWOT Analysis

Under Armour’s objective and passion for the production of highly designed performance attire despite high cost incurred promotes brand name and customer loyalty over competitor products. The company’s expansion of selling units to retail customers, online, and websites supported by the technological shift by consumers provides a great means for product promotion and marketing to lead to profitability, as seen in the current financial position of the company. The growing diversified consumers’ need in the global market is a good opportunity for investment to drive the company objectives to venture into the foreign market. Contractual agreements with manufacturing firms’ pull together the companies’ interest and provide a combined strength to absorb the shocks of rivalry and competition from local and global established firms providing substitute products. The financial strength together with the opportunities promotes profitability, growth, and expansion of the company in the industry

Despite the prospective growth potential of the company, great challenges limit its expansion. Lack of long-term contractual agreements with the manufacturing firms having no obligation to make and use the company’s products leads to reduced market penetration and expansion due to poor brand recognition and customer loyalty. Under Armour, diverse products directed to meet various customer needs faces several setbacks due to the impact of external forces. Petroleum-based products that largely rely on the cost of oil prices, which undergo frequent fluctuation together with charged-cotton products relying on the cotton harvest, have led to unstable product prices and product availability due to the cost of production subsequently damaging the customer trust on the company and brand loyalty. Rival companies and competing substitute products take advantage of these production challenges to gain an extended market segment and threaten the company’s market share while risking market fall-out as a result of poor returns on investment.

Recommendation

To achieve its objectives of increased sales, market penetration, and expansion, Under Armour, must take several tactical steps directed towards reduced production cost, market penetration, stable product price, adequate production of diverse products, and long-term contractual agreements. These steps will provide a robust operation platform for the company to compete in the local and global markets by adequately meeting different customer needs while reducing operational costs and improving product quality and availability to boost net revenue returns.

Strategic Recommendations

Contractual agreements with manufacturing firms provide a great step for market penetration and global expansion. Under Armour Company should take a bold step to make long-term contractual agreements with other firms in foreign markets to boost production and use of its products. In addition, the company should establish constant cotton supply in different cotton production countries for Charged-cotton products that high rely on cotton harvest leading to the shortage in the market. The production of these seasonal cotton products should be bulk during the cotton harvest season and stocked to avoid shortage in the market.

Moreover, the company should target to promote more sponsorship programs in colleges and professional sports organizations in the foreign market as the chief marketing and brand promotion tool. Expansion of selling units with product diversification to meet the increasing number of customers with diverse needs is another strategic marketing tool that is still underutilized. In this view, Under Armour should strive to open and maintain extra stocked selling units in foreign markets while keeping local stores fully facilitated to limit the chances of product shortage or unavailability in the market.

Sales from the foreign market should continually be monitored every quarter, and adjustments made to meet the needs of the diverse customers and competition of the global companies. The company’s profit target should be set and revised for both local and foreign markets every quarter for the whole year. Analyze sponsorship agreements to check the extent of coverage, cost, and effect of individual agreements on the market within a given location—controlled production cost to control the pricing of all company’s products, including Charged-cotton products to build customer loyalty.

Strategic Justification

Production of Charged-cotton products in bulk during the cotton harvest season will help the company meet customer demand of these products throughout the seasons. The production move will help control and stabilize market prices for these cotton products. Establishing additional selling units such as factory outlets, online websites, and retail customers to cut across local and foreign markets will provide customers with easy placement of orders and faster delivery of goods and build customer loyalty while at the same time acting as the marketing and promotional sites. The technology incorporation and additional outlets will provide an additional point of research to understanding customer needs that will promote the company’s objective of meeting the ever-changing diverse customer needs. Additionally, sponsorship programs will provide on-field authenticity of the company’s products to the audience while building a brand relationship with the sports organizations and professional athletes that helps boost trust from other consumers with active lifestyles in the global market. These steps promote market penetration, growth, and expansion of Under Armour in the sports industry across both local.

Appendix: Financial Ratios

Table 1: Profitability Ratios.

Table 2: Liquidity Ratios.

Table 3: Leverages Ratios.

Table 4: Activity Ratios.

• Chicago (A-D)
• Chicago (N-B)

IvyPanda. (2020, November 3). Under Armour Company's Strategic Challenges. https://ivypanda.com/essays/under-armour-companys-strategic-challenges/

"Under Armour Company's Strategic Challenges." IvyPanda , 3 Nov. 2020, ivypanda.com/essays/under-armour-companys-strategic-challenges/.

IvyPanda . (2020) 'Under Armour Company's Strategic Challenges'. 3 November.

IvyPanda . 2020. "Under Armour Company's Strategic Challenges." November 3, 2020. https://ivypanda.com/essays/under-armour-companys-strategic-challenges/.

1. IvyPanda . "Under Armour Company's Strategic Challenges." November 3, 2020. https://ivypanda.com/essays/under-armour-companys-strategic-challenges/.

Bibliography

IvyPanda . "Under Armour Company's Strategic Challenges." November 3, 2020. https://ivypanda.com/essays/under-armour-companys-strategic-challenges/.

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Under Armour is a leading inventor, marketer, and distributor of branded performance athletic apparel, footwear, and accessories. Designed to empower human performance, Under Armour's innovative products and experiences are engineered to make athletes better.

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As we transition, we are committed to identifying additional opportunities to drive improved returns for our shareholders and deliver for athletes, partners, and teammates. There is a huge opportunity in front of us. I look forward to working closely with the board during the search process to find our next leader who will take us to new heights. In the meantime, we are moving forward and will continue to connect with athletes in exciting ways, offering them exactly what they need when they need it.” Frisk, who joined Under Armour in 2017, helped architect its long-term strategic plan that underscored its commitment to athletic performance by reengineering its structure, systems, and go-to-market process. Under his leadership, the company delivered industry-leading products, deepened relationships with consumers and customers, and advanced its purpose, vision, mission, and values. “It has been the greatest privilege of my career to serve Under Armour athletes, customers, shareholders, and teammates. I am extremely proud of what we’ve accomplished as a team,” said Frisk. “Together, we have done a tremendous amount of work to strengthen this iconic brand while significantly solidifying its operations. Colin has an intimate understanding of the Under Armour business and our industry. I have every confidence that his stewardship will allow for a seamless transition.” Browne said, “What unifies and drives Under Armour is our purpose: to empower those who strive for more. This transition is an opportunity to further our long-term goals. I am grateful for Patrik’s leadership and partnership. As we work to deliver industry-leading innovation and premium experiences to athletes globally, we remain focused on amplifying the strong foundation that’s been set over the past few years.” Since joining the company in 2016, Browne modernized Under Armour’s digital go-to-market strategy and direct-to-consumer model and transformed its supply chain organization, leading to significant margin improvement and operating efficiency. Browne has held the role of COO since 2020 and oversees supply chain, global planning, sustainability, information technology, enterprise data management, commercial optimization, go-to-market strategy, and distribution capabilities. Browne has been an integral part of the company's successful transformation, and his leadership has been critical to navigating global supply challenges caused by the pandemic. About Under Armour, Inc. Under Armour, Inc., headquartered in Baltimore, Maryland, is a leading inventor, marketer and distributor of branded athletic performance apparel, footwear, and accessories. Designed to empower human performance, Under Armour’s innovative products and experiences are engineered to make athletes better. For further information, please visit http://about.underarmour.com. Forward Looking Statements Some of the statements contained in this press release constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts, such as statements regarding our future financial condition or results of operations, our prospects, and strategies for future growth, the impact of the COVID-19 pandemic on our business and results of operations, the development and introduction of new products, and the implementation of our marketing and branding strategies. In many cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “outlook,” “potential” or the negative of these terms or other comparable terminology. The forward-looking statements contained in this press release reflect our current views about future events and are subject to risks, uncertainties, assumptions, and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, activity levels, performance, or achievements. Readers are cautioned not to place undue reliance on these forward-looking statements. A number of important factors could cause actual results to differ materially from those indicated by these forward-looking statements, including, but not limited to: the impact of the COVID-19 pandemic on our industry and our business, financial condition and results of operations, including recent impacts on the global supply chain; failure of our suppliers or manufacturers to produce or deliver our products in a timely or cost-effective manner; labor or other disruptions at ports or our suppliers or manufacturers; changes in general economic or market conditions that could affect overall consumer spending or our industry; increased competition causing us to lose market share or reduce the prices of our products or to increase our marketing efforts significantly; fluctuations in the costs of raw materials and commodities we use in our products and our supply chain; changes to the financial health of our customers; our ability to successfully execute our long-term strategies; our ability to effectively drive operational efficiency in our business and successfully execute any restructuring plans and realize their expected benefits; our ability to effectively develop and launch new, innovative and updated products; our ability to accurately forecast consumer shopping and engagement preferences and consumer demand for our products and manage our inventory in response to changing demands; loss of key customers, suppliers or manufacturers; our ability to further expand our business globally and to drive brand awareness and consumer acceptance of our products in other countries; our ability to manage the increasingly complex operations of our global business; the impact of global events beyond our control, including military conflict; our ability to successfully manage or realize expected results from significant transactions and investments; our ability to effectively market and maintain a positive brand image; our ability to effectively meet the expectations of our stakeholders with respect to environmental, social and governance practices; the availability, integration and effective operation of information systems and other technology, as well as any potential interruption of such systems or technology; any disruptions, delays or deficiencies in the design, implementation or application of our global operating and financial reporting information technology system; our ability to attract key talent and retain the services of our senior management and other key employees; our ability to access capital and financing required to manage our business on terms acceptable to us; our ability to accurately anticipate and respond to seasonal or quarterly fluctuations in our operating results; risks related to foreign currency exchange rate fluctuations; our ability to comply with existing trade and other regulations, and the potential impact of new trade, tariff and tax regulations on our profitability; risks related to data security or privacy breaches; and our potential exposure to litigation and other proceedings. The forward-looking statements contained in this press release reflect our views and assumptions only as of the date of this press release. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the statement’s date or to reflect unanticipated events. Under Armour Contacts: Lance Allega, SVP, Investor Relations & Corporate Development, (410) 246-6810 Blake Simpson, SVP, Global Communications, Community Impact & Events, (443) 630-9959

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