May 10, 2023
Photo: Under Armour
Can Under Armour Get Promotional Discounts Under Control?
Promotions could challenge Under Armour’s profit margins in the years to come.
The athleticwear brand reported yesterday that its fourth-quarter gross margin declined 310 basis points to 43.4 percent, driven primarily by higher promotions. CFO David Bergman said that lower ocean and air freight costs helped offset a 400 basis point decline from higher promotional activity at Under Armour’s DTC business as it tried to move excess inventory of products from prior seasons.
Mr. Bergman said the company’s inventory was up 44 percent for the quarter, which was actually better than the 50 percent it was expecting to hold. The brand plans to “pack and hold” about half of the inventory it is carrying “to service designated future demand,” according to its CFO.
Under Armour’s North American revenues were up three percent in the fourth quarter, driven by growth in its wholesale accounts. DTC sales were flat, with online sales posting a “solid” increase that was “offset by softness” in the company’s retail stores.
Stephanie Linnartz has only been president and CEO of Under Armour for a few months and understands the athleticwear brand has work to do to gain ground on competitors including Nike and Adidas.
“In North America, we run a very productive and profitable outlet business with our Factory House concepts, but these represent about 90 percent of our physical DTC locations in the region. That leaves only 18 full-priced brand health stores in our home market, not many places where we can showcase our brand in the best presentation possible. So compared to the roughly 75-25 split that many of our competitors have working for them, this is an opportunity for premium growth,” Ms. Linnartz said.
Under Armour plans to focus on its full-price DTC locations and deliver a better customer experience. Ms. Linnartz said the company’s performance will be “driven by smaller, easier-to-navigate store formats, better storytelling to appeal to young athletes, exceptional customer service and always being in stock. By the end of this calendar year, our full-price concepts will also be revamped to showcase Sportstyle products with a more robust curation. Longer term, we want to build on this progress by expanding the number of full-priced health stores as we perfect this.”
BrainTrust
Jeff Sward
Founding Partner, Merchandising Metrics
Bob Phibbs
President/CEO, The Retail Doctor
Neil Saunders
Managing Director, GlobalData
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Discussion Questions
DISCUSSION QUESTIONS: What do you think Under Armour will achieve with a greater focus on full-price DTC stores? What other challenges and opportunities do you see for the brand in the U.S.?
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With new leadership now installed, the hard work begins. Under Armour’s results are challenged, but I think they are on the right track by focusing on improving their full-price DTC business. Given that Adidas is re-calibrating after the Kanye West debacle and Nike’s results have softened somewhat, it’s the perfect time for Under Armour to make some moves. The conditions are right, but it will take time and focus.
The excess inventory and the discounts to clear it and to drive sales are mostly because Under Armour’s brand does not generate the same levels of loyalty or traction as some competitors and so it is far easier for customers to deprioritize it when times get tough. While it has become a bit more disciplined, the brand is still muddled and does not push things like technical benefits, fabrication, or comfort in a clear enough way. More full-price DTC stores will help Under Armour communicate better, but to be effective this has to be executed alongside better product and ranging decisions.
Under Armour is — in my opinion — one of the most under-appreciated brands in its category. Everything they manufacture they make well and durable. Why this brand cannot be another Lululemon is beyond my understanding. I use their products. I know.
Under Armour’s real problem isn’t promotions. It’s merchandising, planning and forecasting. After all the lessons learned during the pandemic, for a brand to allow that kind of inventory bloat is just unfathomable. They’ve used promotions as a short-term solution but they could very well become a long-term problem.
They’re saying growth is the priority. Well, forecasting growth means forecasting inventory. This whole scenario does not inspire confidence. In the eyes of the customer, just looking at product and marketing, Under Armour can be a formidable competitor to Nike. But the nuts and bolts of the pure business side need a lot of attention.
Competing with Adidas and Nike on full-price apparel/shoes will be difficult as the cachet and loyalty don’t exist with the Under Armour brand. This doesn’t mean that they can’t improve results with more experiential and dynamic full-price stores. Eighteen full-priced stores is nothing. The strategy can serve to elevate their cachet if they execute properly.
If they keep their overall store count the same, that’s only converting 22 more locations into the full-price format. That just doesn’t seem like enough doors to turn the perception around — unless they are growing their overall retail build-out as well. Adding a few more flagships in NYC and LA means nothing.
Under Armour — who had a fantastic Michigan Avenue store — is everywhere, and mostly through discount houses and promotions in other stores. Eighteen stores seems like an after thought. I’m glad Ms. Linnartz is looking to improve the store experience because their merchandising I’ve found to be the best in the bunch.
The biggest challenge is fixing the margin loss in Q4 which was the result of over-aggressive use of discounts. Maybe they had no choice but for most upscale/professional level brands, discounts should be a strategic “knob” that is turned up and down sparingly and only under the right set of circumstances.
I am eager to witness how Under Armour will roll out its strategy of establishing additional full-price DTC in different locations. As an omnichannel brand it is essential to have a robust brick-and-mortar network in addition to an eCommerce presence to maximize business growth potential. Under Armour has a strong online retail presence and by opening new physical store locations, they can efficiently harmonize omnichannel expansion.
In my opinion, it is crucial for Under Armour to proactively implement omnichannel initiatives right from the outset to make the strategy a success. By exploring store locations, they can also drive growth in online sales within those regions. This is why initiatives such as “Ship From Store” and “Buy Online Pick-Up In Store’’ will play a pivotal role for Under Armour, allowing them to offer free same-day/ next-day deliveries and an exceptional shopping experience to the customers.
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With new leadership now installed, the hard work begins. Under Armour’s results are challenged, but I think they are on the right track by focusing on improving their full-price DTC business. Given that Adidas is re-calibrating after the Kanye West debacle and Nike’s results have softened somewhat, it’s the perfect time for Under Armour to make some moves. The conditions are right, but it will take time and focus.
The excess inventory and the discounts to clear it and to drive sales are mostly because Under Armour’s brand does not generate the same levels of loyalty or traction as some competitors and so it is far easier for customers to deprioritize it when times get tough. While it has become a bit more disciplined, the brand is still muddled and does not push things like technical benefits, fabrication, or comfort in a clear enough way. More full-price DTC stores will help Under Armour communicate better, but to be effective this has to be executed alongside better product and ranging decisions.
Under Armour is — in my opinion — one of the most under-appreciated brands in its category. Everything they manufacture they make well and durable. Why this brand cannot be another Lululemon is beyond my understanding. I use their products. I know.
Under Armour’s real problem isn’t promotions. It’s merchandising, planning and forecasting. After all the lessons learned during the pandemic, for a brand to allow that kind of inventory bloat is just unfathomable. They’ve used promotions as a short-term solution but they could very well become a long-term problem.
They’re saying growth is the priority. Well, forecasting growth means forecasting inventory. This whole scenario does not inspire confidence. In the eyes of the customer, just looking at product and marketing, Under Armour can be a formidable competitor to Nike. But the nuts and bolts of the pure business side need a lot of attention.
Competing with Adidas and Nike on full-price apparel/shoes will be difficult as the cachet and loyalty don’t exist with the Under Armour brand. This doesn’t mean that they can’t improve results with more experiential and dynamic full-price stores. Eighteen full-priced stores is nothing. The strategy can serve to elevate their cachet if they execute properly.
If they keep their overall store count the same, that’s only converting 22 more locations into the full-price format. That just doesn’t seem like enough doors to turn the perception around — unless they are growing their overall retail build-out as well. Adding a few more flagships in NYC and LA means nothing.
Under Armour — who had a fantastic Michigan Avenue store — is everywhere, and mostly through discount houses and promotions in other stores. Eighteen stores seems like an after thought. I’m glad Ms. Linnartz is looking to improve the store experience because their merchandising I’ve found to be the best in the bunch.
The biggest challenge is fixing the margin loss in Q4 which was the result of over-aggressive use of discounts. Maybe they had no choice but for most upscale/professional level brands, discounts should be a strategic “knob” that is turned up and down sparingly and only under the right set of circumstances.
I am eager to witness how Under Armour will roll out its strategy of establishing additional full-price DTC in different locations. As an omnichannel brand it is essential to have a robust brick-and-mortar network in addition to an eCommerce presence to maximize business growth potential. Under Armour has a strong online retail presence and by opening new physical store locations, they can efficiently harmonize omnichannel expansion.
In my opinion, it is crucial for Under Armour to proactively implement omnichannel initiatives right from the outset to make the strategy a success. By exploring store locations, they can also drive growth in online sales within those regions. This is why initiatives such as “Ship From Store” and “Buy Online Pick-Up In Store’’ will play a pivotal role for Under Armour, allowing them to offer free same-day/ next-day deliveries and an exceptional shopping experience to the customers.