Under Armour (NYSE:UA)(NYSE:UAA) has faced some growth challenges recently, and the stock has taken a beating because of it. One of Under Armour's biggest opportunities for new growth now is in China, but outpacing its rivals there, such as Nike (NYSE:NKE) and Adidas (NASDAQOTH:ADDYY), might be a tall order. Here's why this is an important opportunity, and what to watch in the quarters ahead to see what it could mean for Under Armour.
International sales growth in focus
Under Armour's North American sales still make up around 84% of total revenue, and that segment showed unimpressive growth of less than 6% year over year for all of 2016. But international sales are growing much faster and hold the potential for more long-term growth ahead. Under Armour CEO Kevin Plank said this during the Q4 and full-year earnings call:
Our international business continues to deliver strong top-line results as we elevate and expand our brand reach around the world. With a 55% increase to $215 million, our international business reached 16% of total revenues in the fourth quarter. Excluding currency, revenues were up 60%. The continued momentum we saw in the fourth quarter across all of our international regions, especially in the Asia-Pacific region, gives us increasing confidence in the investments we have made and the strategy we have executed against to scale our brand around the globe.
Under Armour's China opportunity
Under Armour doesn't break out its China sales specifically in its earnings, but in the Q3 earnings call, management did say the company is on track to more than double its 2015 sales in China of $80 million. When analysts pressed management on that point during the Q4 call, Dave Bergman, senior vice president of corporate finance, said the company is "very bullish" on China and added: "It's been one of our highest growth and becoming very, very profitable for us. A lot of great, great relationships that we're building in that market with great leadership."
Much of Under Armour's success in China so far seems to be driven by brand ambassador and two-time NBA MVP Steph Curry. Basketball has taken China by storm in recent years, and the NBA is big there. Curry has made two separate tours to China already for Under Armour, and his signature shoes seem to be performing well there.
It's not just basketball, however, as running is a growing segment opportunity that Under Armour hopes will continue to bode well for the running shoes and apparel it's marketing heavily in the region. Under Armour has said in 2016 that it's planning for more brand stores in China, along with "local-for-local" manufacturing, and a strong e-commerce presence in the region that will help to grow sales there in 2017 and beyond.
It won't be easy -- but it's more important than ever
While the opportunity for more growth in China seems large, and especially important now that Under Armour's sales growth is slowing in North America, it won't be as easy as it sounds. Under Armour will face some serious competition to its measured approach in China as a Western sports brand looking to get a foothold there.
Nike and Adidas have each made China a focus of their own international growth for years, and both are already far ahead of Under Armour there still growing rapidly. Nike's most recent quarter's sales in China were $1 billion, more than all of Under Armour's international sales. Adidas' most recent quarter's sales there were $822 million, up 25% year over year, adjusted for currency changes. Nike especially is fighting hard to continue dominating the basketball market worldwide, and Adidas' longer history and market penetration in Asia won't be easily pushed aside.
Still, growth in China continues to present a major opportunity for a brand that's trying to double sales -- Under Armour repeatedly talks about becoming a $10 billion brand in the not-too-distant-future. While its 2016 international sales growth is impressive, at only 16% of total sales, it's just not moving the needle fast enough -- yet. Under Armour believes that growing international sales trends will continue, and that those sales could make up 20% of total revenue for all of 2017. For that to happen, it's probably going to need to continue performing very well in China, even in the face of fierce competition from Nike, Adidas, and many others.
Seth McNew owns shares of Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool owns shares of and recommends Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.