Is Under Armour Too Dependent on Brand Power?

Although Under Armour has succeeded as a result of its impressive brand power, the company may now be too dependent on it for future growth.

Jul 13, 2014 at 7:05AM

Almost all successful high-end retailers have one thing in common: strong brand perception among consumers. A strong brand translates into loyal customers and increased pricing power, which means more reliable revenue streams and higher margins/earnings power.

An exceptionally strong brand right now is that of athletic apparel, footwear, and accessories manufacturer Under Armour (NYSE:UA). Management at the Baltimore-based company has worked hard over the years to cement the brand as one of the premiere athletic labels in North America. Through strategic sponsorships and clever advertising campaigns, Under Armour has grown its consumer base significantly, all while maintaining immense brand power.

However, the company's continued success is dependent upon management's ability to anticipate the changing needs and demands of the notoriously fickle consumer. While management has performed well in this regard in recent years, this risk factor needs to be considered by all investors going forward.

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Source: Company Facebook 

Strong brand power
Under Armour started out as a male-centric, niche football brand when it was founded in 1996 by current CEO Kevin Plank. Over the years, the company has expanded its audience while continuing to preserve its commitment to make all athletes better through innovation.

Fast forward almost two decades later, and the company's products are being worn by men and women, youths and adults, athletes and casual folk.

The rapid expansion of the brand has led to robust revenue growth for the company. Most recently, Under Armour grew first- quarter revenue an impressive 36% on a year-over-year basis. Earnings per share increased a staggering 71% in the first quarter.

The impact of a weakening brand
Under Armour's results are particularly impressive when compared to competitor lululemon athletica (NASDAQ:LULU), a yoga-inspired lifestyle apparel company that has experienced numerous problems in recent years regarding its brand image, which has subsequently led to dampened consumer sentiment.

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lululemon logo. Source: Company Facebook

On top of a massive product recall in 2013, Lululemon management has not done well to curb negativity surrounding the company's brand. Disparaging remarks from company founder and then-chairman of the board Chip Wilson alienated some of Lululemon's loyal clientele. Additionally, management's inability to effectively target male consumers has also stifled some of the brand's potential growth.

The company's revenue growth has slowed considerably from a few years ago, when Lululemon was growing sales in the mid 20% range. According to Yahoo! Finance, analysts now expect the yoga company to grow revenue just 11.7% in the fiscal year ending January 2015. Meanwhile, Under Armour is expected to grow revenue 25.8% in the fiscal year ending December.

Is Under Armour at risk?
Unfortunately, every company that depends on a strong brand image to drive sales is at risk of encountering problems similar to Lululemon. Navigating the tricky waters of consumer sentiment is simply the nature of any retail business. 

Under Armour's 10-K filing reflects as much. The document states one of the company's primary risk factors as "our ability to accurately forecast consumer demand for our products and manage our inventory in response to changing demands."

Fortunately, Under Armour's management has proven itself adept at handling potentially troubling situations. Take the recent 2014 Winter Olympics in Sochi, where Under Armour sponsored Team USA's speedskating squad. A controversy erupted when some of Team USA's skaters blamed their poor performances on reportedly faulty Under Armour uniforms. 

Under Armour management quickly defended the company without placing blame on Team USA. After issuing new uniforms to the team, which didn't make a difference and exonerated the company in the process, management at Under Armour extended its deal with Team USA skating out until 2022, turning a negative into a huge positive.

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(Under Armour and Notre Dame have joined forces for the 2014 season. Source: Company Facebook)

Bottom line
While investors can't escape the overall risk of a dependence on consumer preferences, they can choose to invest in retail companies with management teams that know how to handle controversy well. Under Armour management has proven that it has what it takes to protect the company's powerful brand image going forward, and this lessens investor risk considerably.

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Philip Saglimbeni owns shares of Under Armour. The Motley Fool recommends Lululemon Athletica and Under Armour. The Motley Fool owns shares of Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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