They're Young, They Play Sports, and Under Armour and Dick's Sporting Goods Want Their Business

The youth are our future -- and they may also be the future of Under Armour and Dick's Sporting Goods.

Aug 10, 2014 at 11:03AM

According to Under Armour (NYSE:UA), its recent conversations with Dick's Sporting Goods (NYSE:DKS) and other wholesale partners have revolved around the question, "What can I do to attack the youth business?" Under Armour has been giving it all the gas it has, and the company believes that the growth opportunity in youth is huge. As it turns out, Dick's believes the same thing, and the two have an opportunity to open up the market. 

Source: Under Armour. 

For Dick's, youth sales represent a higher-margin product than fitness and golf equipment, which clogs floor space right now without giving as much back. The company has made a shift already to try to expand its youth category -- including apparel, shoes, and backpacks -- and it's seen very strong growth. 

Youth sports participation in America
According to a 2013 study by ESPN, 21.5 million kids between ages 6 and 17 play a team sport. That represents about 7% of the entire U.S. population and means that the opportunity in youth sports apparel and equipment could be huge. I say "could" because two factors work against retailers in this division.

First, youth sports are having some trouble. Even with a massive base, many youth sports are seeing declining participation rates as parents worry about injury, schools lose physical education funding, and costs to participate rise. This is a long-term concern for companies investing in the segment, like Under Armour and Dick's Sporting Goods. For now, however, such a small portion of overall revenue comes from youth sales that a shrinking base is not going to constrict growth, as much of the market is untapped.

Second, parents have held their purse strings tightly for the teen segment recently. Retailers who focus on teen apparel have seen small sales gains, at best. The more common result has been a decline in sales, as parents -- who are under financial pressure from stagnating wages -- hold out to buy necessary items. There has been some evidence that spending on sporting goods has been immune to this pressure so far, but the sales are still dependent on Mom and Dad pulling out the credit card.

The opportunity for Under Armour and Dick's
Both companies are looking on the bright side, though, and they've seen early success. Dick's said that sales growth in its youth goods has been above even that of its women's division, which put up growth in the low teens last quarter. Under Armour has said that its girls division is "on fire" and that youth represents one of its biggest opportunities, along with women's.

For Under Armour, youth sales also mean a pipeline to future adult sales. The company knows that getting kids hooked on the brand early can lead to future brand advocates, and has said that it's working with many of its distributors -- like Dick's -- to get more floor space devoted to youth apparel and footwear.

For investors, these sorts of moves should help solidify the strong position that Under Armour already holds. If the company can make youth one of its defining categories, then it should be able to see massive growth in the coming years as the brand catches on and as parents get back to spending. For Dick's Sporting Goods, youth sales might offer a way out of the company's recently dug hole. Sales in youth items have been strong, and the pull may help bring adult shoppers into the store with their kids. Look for this segment to grow over the next five years, and for Under Armour and Dick's to be right out in front.

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Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends and 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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