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My colleague Rich Smith penned a really good piece on Under Amour's ambitions and struggles to compete in the $2.5 billion basketball sneaker market. The company has spent $613 million since 2008 to get its new shoe line up and running, which represents an increase of 64% over the company's 2007 costs. This spending has only increased sales by 52% in the same period, giving Under Armour a whopping 1.1% of a basketball shoe market in which Nike controls 95%. Rich writes:
I think the real question is why UA would even bother tackling the basketball shoe market. I mean, sure, it's $2.5 billion in annual revenues. Yeah, Nike's got 95% of that today. Chances are UA can chip away at that if it tries. But should Kevin even want to "be like Mike"? UA already does a fabulous job making athletic sportswear, but profit margins have always been slimmer in shoes. Footwear specialists Timberland (NYSE: TBL ) , Wolverine World Wide (NYSE: WWW ) , and Deckers (Nasdaq: DECK ) all sport gross margins inferior to UA's clothes-centric 49% -- and Nike, king of athletic footwear, falls short.
The Kevin he is referring to is Under Armour CEO and perennial underdog Kevin Plank. This isn't the first time Plank has been doubted. No one thought he was big enough to play Division I football, but he not only walked onto the University of Maryland team and earned a scholarship, he also became captain. And no one thought his "athletic T-shirt" company would make it out of his grandmother's basement to compete with Nike, let alone create an entirely new athletic apparel genre. However, Under Armour dominates Nike and all of its other competitors, with a 74% market share in the performance apparel category.
Sure, he might be "cocky" at this point of his career, but I'm not going to doubt him.
The only way to stay great is to change
Does Under Armour need to get into the shoe business? Did Apple (Nasdaq: AAPL ) need to get into the "Walkman" (iPod) business or smartphone business? No. Apple was making great computers. It could have just stayed in that business like Dell (Nasdaq: DELL ) . The businesses are very different, but the idea is the same. Great companies can't and don't remain stagnant. They must continue to innovate and grow in order to remain great.
Visibility is key
Under Armour is still a very small company in comparison with Nike. The company's market capitalization of $2.44 billion to Nike's $39 billion represents a blip on the latter giant's radar. Under Armour is still relatively unknown to many around the country, and especially the rest of the world. While Nike became a household name with the ascension of Michael Jordan, and the Air Jordan brand, most analysts believe there will never be another Michael Jordan in terms of shoe sales. SportsOneSource analyst Matt Powell says, "There's only one guy who has sold a lot of shoes, and everybody seems to think, 'I've just got to find the next Jordan.' Well, there isn't another Jordan for anybody."
Plank understands the importance of the visibility his brand receives when its products are worn by well-known pro and collegiate athletes. Two years ago, he was asked whether the company would ever enter the basketball shoe business. Plank said:
The next chapter in the book is absolutely basketball. We've signed some basketball assets. We're going to be in the basketball business some day. ... Our goal is the ability to outfit a major college program. I'm talking about the Ohio States of the world, with 43 sports.
This is where the importance of the basketball shoes comes into play for Under Armour. Trying to win essential sponsorship deals with important college athletic programs was not easy without a shoe line. Even the University of Maryland wasn't willing to leave Nike. When the school's contract was up with Nike, it allowed Under Armour to outfit the university in everything but athletic shoes. However, in September 2008, with Under Armour's athletic shoe ambitions now well-known, the university signed a five-year, $17.5 million deal that gave the company the right to outfit all university athletic apparel.
Can't value that publicity
Since that time, Under Armour has inked a handful of similar deals with big Division I programs, and also provides athletic apparel to 50 other colleges that wear Under Armour togs, though not exclusively. Many of these deals would not have been possible without a shoe line to allow Under Armour to fit athletes from head to toe.
Certainly, executives and investors have hoped for more rapid returns from the shoe business, but it has created opportunities for growth that were not available in the past. I would argue that this business segment, and the essential visibility it brings, is necessary for the company to continue its impressive growth.
Kevin doesn't want to be like Mike; he wants to be like Kevin. I'm willing to give him the chance.