Click-clack ."I Think You Hear Us Coming."
That's the new slogan for Under Armour's (Nasdaq: UARM ) brand of football cleats, which will be released on June 3. These cleats are the subject of much anticipation for both investors and consumers. Television commercials during the NFL Draft, featuring first-round selections A.J. Hawk and Vernon Davis, have fueled enthusiasm among varsity and pee-wee players alike. Meanwhile, investors are watching closely to see whether Under Armour will succeed in the strategically important footwear market. However, even a successful launch of football cleats may not be enough to meet the market's expectations for soaring growth.
Management has announced targets of $8 million-$10 million in football cleat sales this year, which would be 5%-10% of the wholesale market for football cleats. The company will likely exceed these targets based on a strong brand, a slick ad campaign, and a selective distribution strategy.
Football cleats play into the strongest area of Under Armour's brand. They're the merchandising equivalent of preaching to the choir. Founder Kevin Plank is a former University of Maryland player, and his initial compression shirts were designed for and tested by football players. Under Armour also has serious credibility with younger consumers, and most competitive football players are teenagers.
Under Armour is a brilliant promoter, and it has concocted a big ad campaign to hype up football cleats. The campaign was mysteriously previewed last summer during Under Armour's famous "Protect This House" advertisements. The new commercials, featuring young NFL stars, have the same hardcore vibe as those earlier ads. In addition to television ads, the shoes will be showcased museum-style in glass cases at retailers. Customers who preorder will receive free "Click-Clack" dog tags.
Under Armour's distribution strategy ensures that it will meet targets. Big-box retailers like Dick's Sporting Goods (NYSE: DKS ) and Sports Authority (NYSE: TSA ) will sell 70% of the cleats. These retailers have made advance purchase commitments, which means that $5 million-$7 million in sales are already in the bag. Under Armour is also taking preorders from consumers via the Internet.
All of these factors indicate that Under Armour could significantly overdeliver on the $8 million-$10 million sales target. In fact, it wouldn't be surprising if it sells $12 million-$15 million worth of cleats. However, $15 million in sales represents less than 5% of the approximately $350 million in sales the company is expected to deliver this fiscal year.
Under Armour has a P/E of 75, and Wall Street forecasts call for five-year annual revenue growth of 25%, which amounts to $850 million by 2010. The wholesale market for football cleats is only $120 million, based on last year's sales; growth is forecast at 4.5% per year. If Under Armour gains 40% market share by 2010, that would only be $58 million in sales, or less than 7% of Wall Street's estimate.
The market for football cleats is too small to have a significant impact on Under Armour's share price. Cleats have the most potential as a strategic beachhead into the $15 billion wholesale market for footwear. Nike (NYSE: NKE ) alone has footwear sales exceeding $7 billion. If Under Armour wants to be a global athletic brand, it needs to grab a bigger piece of that lucrative market.
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