Under Armour's Existential Crisis: Niche Player Or Global Competitor?

Under Armour Inc UAA reported a first-quarter earnings and sales beat Tuesday, but it wasn't enough to prop up the struggling athletic apparel brand's stock.

Sales for the Baltimore-based company came in at $1.2 billion, beating estimates by $100 million. Earnings came in flat and beat estimates by 6 cents. It was Under Armour's second-quarter guidance that fell short of analyst estimates, with the company projecting similar growth as in the first quarter.

Until the earnings report, Under Armour had been quietly outperforming Nike Inc NKE year-to-date, with an 18-percent gain on the year. This was more likely due to a slight recovery in shares due to the beating the stock took in 2017 than outperformance.

'Great Brand, Good Company'

Weakness in North America continues to weigh on Under Armour and it appears likely to continue for some time as the company looks to take a more targeted approach with consumers.

Under Armour showed progress in direct-to-consumer, with sales up 17 percent. The international segment, which is up 27 percent, remains the brand's largest growth opportunity.

“Under Armour is a great brand and a good company," CEO Kevin Plank said on the earnings call, opening with a subtle hint about the business's relative underperformance and speaking on the strategy moving forward.

“Going to market with significantly less SKUs, optimized margin targets and meaningfully shorter calendars means our ability to segment gets sharper with each new season.”

As a growing global brand, Under Armour’s core purpose and reason for existence is athletic performance, Plank said. He acknowledged that 2017 and 2018 have unquestionably been one of the most difficult periods in the company’s history.

Athletic performance wear has increasingly fallen out of favor in the marketplace, yet the brand stuck to its guns. This creates an existential crisis — and turning point — for Under Armour moving forward.

A Brand's Identity

Does Under Armour want to be solely an athletic performance brand?

It's an an undoubtedly smaller market than sportswear, and Under Armour could simply fluctuate with the ups and downs of a segment that NPD Group's Matt Powell said isn't coming back into fashion anytime soon.

Under Armour continues with its athletic performance ethos, but Plank has always indicated he wants to compete with Nike and adidas AG (ADR) ADDYY. To do so, a pivot to sportswear is essential, Powell said.

“Sometimes performance is fashion, but right now it is not. The real key is [whether] they make the pivot to sportswear to get a bigger part of the market. We are clearly in a sportswear cycle. Performance is not driving the business at all,” Powell told Benzinga.

“Sportswear is bigger than performance. Some brands decide to only be a performance brand like Brooks, but it means they will be chasing a smaller number. Certainly brands have made that decision, and I think the consequences of that are that the brand is always going to be destined to chase a smaller portion of the business. Brooks had a very good year, but if that’s all you are going to focus on, that means you are going to be a smaller brand."

Citing NPD data, Powell said 18 percent of consumers surveyed last year used performance shoes for their intended purpose and 60 percent of people who wear activewear never exercise.

Basketball Not The Answer?

A hallmark of Under Armour's rapid ascension in 2015 was an entrance into the footwear market headlined by star endorser Steph Curry's first signature basketball shoe release, which sparked numerous headlines. Unfortunately for the brand, this coincided with the decline of performance basketball shoes as an on-trend fashion statement.

While recent results showing Curry had the fourth best-selling signature basketball shoe in 2017 sound promising, Powell said the performance basketball market is just 5 percent of the overall sneaker market — and the top five signature shoe sellers represent an even smaller portion of that market.

"Performance basketball is not a growth story. It's really a tiny portion of the business that gets far too much attention," Powell said.

With Adidas and Nike generating more business internationally than in the U.S., there's still a ripe opportunity for Under Armour to capture global market share — but until Under Armour addresses its sportswear issue head-on, the company's struggles in North America could persist.

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Photo courtesy of Under Armour.