At its bi-annual Investor Day meeting last week, Under Amour Inc. set a 2018 net revenues target of $7.5 billion, easily double its $3.1 billion in net revenues in 2014. In doing so, the company ramped up its impressive growth rate target from 22 percent to 25 percent
Hosted at its global headquarters in Baltimore, Under Armour’s team highlighted many of the company's strategies to continue strong growth in key areas of its business, including expanding its core businesses in apparel, North America, and global wholesale as well as intensifying its focus on evolving its consumer-centric sport category structure.
In addition to updating its revenue goals, the company’s other targets include:
Long-term operating income target of $800 million, representing a 23 percent compounded annual growth rate from $354 million in 2014 and inclusive of the company's Connected Fitness acquisitions in early 2015;
A consistent gross margin of approximately 49 percent as ongoing product margin opportunities and mix benefits from direct-to-consumer (DTC) and Connected Fitness are offset by the higher mix of international and footwear businesses;
SG&A expenses are expected to grow modestly ahead of the company's revenue trajectory through 2018 to support ramping growth segments in areas such as footwear and international, ongoing investment in areas such as Connected Fitness and global DTC, as well as infrastructure investments to support the long-term growth trajectory and enable improved long-term efficiency;
EPS growth is projected to be approximately in-line with operating income growth as higher interest expense and share count dilution are expected to be offset by a reduction in the company's effective tax rate;
Capital needs are expected to be ramped up to between 8 percent and 10 percent of net revenues annually in order to develop the capabilities and capacity needed to scale the global business.
At the event, Kevin Plank, chairman and CEO, said the company pretty much continues to focus on the five growth drivers management initially laid out on its road show in 2005 when it went public and the company was basically a “jockey men's football brand.” The drivers are: men's apparel, women's apparel, footwear, international and DTC.
Pointing to the company’s evolution since then, he noted that UA was “basically a compression company” in 2005. The company owned 65 percent of the compression apparel market and now owns around 10 percent as it has expanded into areas like women's and footwear, as well as extensions such as loose-fit apparel, shorts and accessories
“Today, we are a much more balanced company across our men's category, and have grown women's, youth and footwear each in a business that's larger than the size of our complete company in 2005,” said Plank.
Women’s has grown to nearly 30 percent of the mix from 20 percent in 2005.
Under Armour didn’t have any footwear in 2005 but came out with football cleats in 2006 and now has a 40 percent share in that category. That was followed by baseball cleats in 2007, training shoes in 2008, running shoes in 2009, and basketball shoes in 2010. Plank said UA will make nearly 30 million pairs of shoes in 2015 while noting that’s still miniscule compared to the half a billion produced annually by Nike.
“And I can tell you we don't enjoy playing number two to anyone,” he added. “So we continue to have our sights set on what we can be and what we can mean as a footwear company. This leaves us plenty of runway to grow.”
Internationally, Under Armour has expanded from just four countries in 2005 U.S., Japan, U.K. and Canada to over 60. International sales grew 96 percent last year and 83 percent in the first half of this year, and now is 12 percent of overall sales.
Regarding DTC, UA had one U.S. website and four outlet stores in 2005 and has expanded to 24 e-commerce sites and more than 300 stores globally.
The newest platform is Connected Fitness, formed over the last two years with its acquisitions of MapMyFitness, Endomondo and MyFitnessPal. But Plank asserted that Connected Fitness “not a new growth driver for us.” Rather, “It actually sits above all of our growth drivers. It helps empower and drive all of them.”
Indeed, Plank said the acquisitions of MapMyFitness, MyFitnessPal and Endomondo were made to drive innovation around categories such as apparel and shoes by being able to capture data such as sleep, exercise, activity, nutrition, weight, and how its digital members feel.
“It will help us make better business decisions that will inform us about our athletes to build better products that are more on time with them and ultimately, most importantly, enriching people's lives,” said Plank. “This type of engagement is something that of course will drive loyalty and sales, but we also have a very big belief in what this is going to mean for us as we continue to unite our systems.”
Under Armour now has 440 people in offices from Copenhagen, Austin, San Francisco and Baltimore supporting its digital strategy. That includes more than 300 engineers and app developers today versus less than a dozen just two years ago. The company has over 130 million registered users downloading more than 100,000 of one of its four apps every single day.
“The opportunity here remains a bit undefined but we believe this area will be additive across our five growth drivers, and part of what differentiates us as a company,” said Plank.
In his presentation, Henry Stafford, Under Armour’s chief merchandising officer, outlined five key strategies to grow the business:
Sport category focus
Innovative product
Global merchandising
Speed
Reaching more athletes
The company plans to focus on eight categories: team sports, men's training, women's training & studio, outdoor, golf, run, basketball and global football. Of the eight, Under Armour has double-digit market share in only one, men's training.
“When we reach double-digit market share in all of these, that will take us far beyond the $7.5 billion that we are talking about in 2018,” Stafford added.
The company also plans to reach a new 9th category, Under Armour Sportswear that addresses the athletes’ needs “24 hours a day, seven days a week.”
Strafford said the most consistent request the company gets from athletes and consumers is for the company to “bring an Under Armour approach to sportswear.” But he also said Under Armour’s two largest competitors, Nike and Adidas, make up around 25 percent of their sales from sportswear. He added, “They have about $12.5 billion combined in revenues. We are at zero.”
The Sportswear line will be launched in mid-2016 with expectations to slowly reach scale by 2018. Stafford added, “We will outfit the athlete on and off the field, bringing a unique and distinct point of view to sportswear. Our approach will be through authenticity and dictating trend.”
Among its largest categories, apparel is expected to continue to grow over a 20 percent CAGR (compound annual growth rate), approaching $5 billion in 2018, doubling its size in 2014.
Regarding men’s apparel, Strafford said the “pipeline of innovations is absolutely full” to support growth in core areas like training whlle newer categories like golf, basketball, global football and outdoor provide “significant runway for growth.”
Youth apparel “is also on a tremendous run” and Strafford said the brand benefits by not making take-down adult product for kids or licensing out the category. The company also recognizes that kids are future adult customers. Said Strafford, “An Under Armour kid today will be with us for decades, and our strength in apparel and footwear for kids will pay us significant dividends in the years to come. We are the brand of the next generation.”
Kelly Cortina, the company's VP, women's, pointed out that many companies are aiming at the women's activewear market, which has seen over 15 percent growth over the last three years. The advantage for Under Armour is its focus on team and UA is seeing growth of 40 percent in its women's team categories. Said Cortina, “We know that the team athlete trusts us and we will dress her as she grows up and as her outfitting preferences evolve.”
She noted that 42 percent of high school athletes are female, U.S. high school soccer participation for females has more than tripled in the last 15 years, and there are over 10 million women running in the U.S. alone. UA also plans to tap women through its Connected Fitness platform, which is two-thirds female.
“We can learn every single day from over 100 million women, and growing. It is an incredible resource for our product and design teams and we're thrilled,” said Cortina.
On the other side, Under Armour opened its New York City design house and continues to recruit talent to make sure the brand is hitting trend-forward styles and silhouettes. Said Cortina, “Assets like fit and proportion, pocketing, trim details, color and texture are considered critical to meeting her performance needs.”
Cortina finally noted that the brand is “just scratching the surface in women's accessories and women's footwear.”
Footwear is expected to expand at a 40 percent CAGR over the next three years. Sales are expected to reach $1.7 billion, or 22 percent of sales by 2018, up from $430 million, or 14 percent of revenues, in 2014. The overall footwear growth is build on successes such as Steph Curry's basketball shoe, Speedform in running, and the Highlight cleat.
Under Armour's North American business has grown 26 percent CAGR from 2011 through 2014, and is expected to expand at a 21 percent CAGR from 2014 through 2018. Sales are expected to reach almost $6 billion in 2018, up from just under $2.8 billion in 2014.
International sales are expected to deliver a 50 percent CAGR going from 9 percent of revenues in 2014 to 18 percent of total revenues. Sales are expected to reach $1.35 billion in 2018, up from $270 million in 2014.
Charlie Maurath, Under Armour's president of international, said brand is already 50 percent ahead of its 2015 plan and has been helped by expanding awareness through a number of global football club signings, athlete signings, store openings, as well as strategic partnerships.
The wholesale business globally is expected to double in size from 2014 to 2018 with a CAGR above 20 percent.
Global DTC is expected to grow at a 30 percent CAGR and reach 35 percent of Under Armour’s total business by 2018, up from a 30 percent mix in 2014.
By 2018, Under Armour expects to have over 1,000 stores worldwide in close to 40 countries with over 3 million square feet of retail space. Eighty percent of its doors will be located outside of North America by 2018, up from only 38 percent currently.
DTC growth in North America is expected to see over a 20 percent CAGR over the next three years while international will be growing at close to 10 times that rate. By 2018, 70 percent of its store count will be partner-operated in line to support its overseas expansion. Said Susie McCabe, Under Armour’s SVP of global retail, “By working with partners, we enable our growth, increase our speed, and manage our investment and our risk.”
E-commerce will have the highest growth percentage gains, mainly attributable to expected benefits from its Connected Fitness platform.
Connected Fitness revenues – attributable to advertising, subscription services, and licensing from the platform is expected to reach $200 million by 2018.
