Under Armour (NYSE:UAA)(NYSE:UA) surprised investors with better-than-expected revenue in its 2017 fourth-quarter earnings report. While this was a welcome change after a difficult year, the performance-apparel company is only halfway through its two-year turnaround effort. Industry veteran and COO Patrik Frisk is leading the charge to overhaul how the company brings its products to market, with the goal of returning the company to profitable growth. Read on for the details of the plan, which touches just about every part of Under Armour's business.
Put customers first
The first part of Frisk's plan is to put customers "at the center of what we do." While it seems like a no-brainer, Frisk called out the company as being "inconsistent" with its brand promise in the Q3 2017 earnings call and added, "That inconsistency stops now."
To better understand its customers, the company recently completed a global segmentation study targeting 20,000 people. The survey covered the customer experience, Under Armour's products, and why people shop for Under Armour. The quantitative and qualitative data are being used to better understand its existing market, find opportunities to serve new markets, and inform its strategic planning. The result will be a strategic plan that will prioritize the company's product and positioning decisions, and help drive the second initiative: simplification.
When Frisk joined the company last year, one of his first impressions was that Under Armour had "in many ways, willed itself to get where we are today," and that the company had a number of inefficiencies across its business. What he calls a simplification effort is more about having a game plan, clarifying the positions on the field, and having a playbook that works.
"As we work through this transformation, we're focused on keeping structure, process, and go-to-market continuously aligned to ensure repeatable outcomes," Frisk said.
The first part of this effort is cutting space and services that are no longer needed through the announced $110 million to $130 million restructuring plan. Second is to align the product pipeline with the customer segmentation study. Third is to reduce the number of stock keeping units (SKUs) the company produces by 30% to 40% and move to a quarterly go-to-market calendar from a semiannual one.
Frisk explained that these changes are about "doing more with less" -- having a narrower focus on fewer, more customer-centric products on a shorter release cycle will allow the company to innovate faster, which should result in sustainable growth.
Sustain profitable growth
With simplification efforts driving greater "operational agility", the company can focus on the biggest opportunities. Frisk indicated that men's training, men's running, and women's training are product categories that will get increased focus because of their large market opportunities and consistent growth. These products will be managed with more "accountability and financial discipline" in its product category management structure.
Frisk's emphasis on accountability is not surprising. Right before the company announced disappointing results in the women's category in the third quarter last year, there were two senior executive departures announced: the head of the women's category and the chief marketing officer. Both positions were part of Frisk's organization.
Frisk also wants to continue to invest in international business, especially China. It is part of the Asia Pacific region, which grew an amazing 61% year over year. China is also "becoming very profitable" said CFO Dave Bergman.
CEO Kevin Plank expressed his excitement about the region, indicating that the China team has opened hundreds of new brick-and-mortar stores in 2017, and "we'll repeat that again this year."
E-commerce is becoming more important for the company by giving it more control over the entire customer experience. This is especially important at a time when Plank admits "the [customer's] expectation, the shopping experience, is incredibly competitive and something that we've got to be great at." Frisk indicated the direct-to-consumer channel (including e-commerce) provides "an amazing experience for consumers to engage Under Armour and for us to tell our brand story." This channel grew 11%, up to a record 42% of overall revenue, in the most recent quarter.
There are a lot of moving parts to Frisk's plan. Changing the fundamental processes that design, market, and deliver products to customers is not easy, especially in a company that has grown tremendously despite internal inefficiencies. Simplifying the breadth of products is a great way to put more focus on the best opportunities, but it's also risky.
Bottom line: I like this plan, but I don't expect things to go perfectly. There will likely be bumps in the road as this plan is executed, but I think Frisk's no-nonsense approach is just what the company needs right now.
Brian Withers owns shares of Under Armour (A Shares) and Under Armour (C Shares). The Motley Fool owns shares of and recommends Under Armour (A Shares) and Under Armour (C Shares). The Motley Fool has a disclosure policy.