Throughout history, the sports world has produced some of the most dramatic comeback stories ever told. While this story doesn't involve an athlete improbably returning to glory from a devastating injury, it does examine the revival that's unfolding at athletic apparel maker Under Armour (NYSE:UA).
Like an up-and-coming sports star, Under Armour was a fan-favorite among growth investors when it steadily produced quarterly revenue increases of 20-30% in the 2014-2016 timeframe.
Just as Under Armour's rise made it a viable competitive threat to athletic footwear and apparel powerhouses like Nike and Adidas, the company lost its way and hit rock bottom in the early days of the pandemic.
Meanwhile, rival Nike ran up the score on the down-and-out company, capitalizing on rising enthusiasm for running, outdoor activities, and working out at home.
The divergence in top-line performance between the two companies has been striking, clearly pointing to significant market share gains for Nike over Under Armour. Excluding the most recent quarterly results for each company, Nike averaged a 1.2% year over year revenue decline over the past six quarters compared to a 10.5% drop for Under Armour.
Consequently, Under Armour's stock plummeted to multi-year lows last May as it fell further behind the competition.
A knockout in slow motion
Under Armour's downfall didn't happen overnight. Rather, like a boxer taking punches over several rounds before eventually falling to mat, Under Armour's miscues took their toll over time.
The first signs of trouble emerged in early 2017 when its quarterly top-line growth rates dove to mid-single digit levels. Under's Armour's once-formidable North America segment (~60% of total sales) became an achilles heel as its sports performance-based apparel fell out of favor.
Unwilling to adapt to the consumer trend toward everyday athleisure wear, such as the products sold by Lululemon Athletica, the North America segment experienced sales declines of 5% and 2% in 2017 and 2018, respectively.
Simultaneously, Under Armour fell behind the curve with its digital platform. This would factor into the company's underperformance when COVID-19 swept across the country last spring, which turbo-charged the acceleration toward e-commerce.
On the surface, Under Armour's 40% e-commerce growth in 2020 looks solid. However, when stacked up against an average of 74% digital sales growth for Nike over the past four quarters, the results lose their luster.
Instead of prioritizing its e-commerce platform, the company became more reliant on its wholesale business. Flooding the shelves of Dick's Sporting Goods and Kohl's with unpopular products turned out to be a disastrous move, though -- and not just for Under Armour.
During Dick's Sporting Goods' 4Q18 earnings conference call, former CEO Ed Stack singled out Under Armour as a cause for the company's revenue shortfall. He stated that growth in other brands were "offset by weakness in the Under Armour brand", adding that Under Armour sales were impacted by "expanded distribution."
The end result was that Under Armour's wholesale customers scaled back on orders, causing prices and margins to slide. At that point, it became clear that Under Armour needed a new vision.
A tougher and leaner company returns to the ring
While taking a beating during the 2017-2019 span, gross margin eroded to the 45-46% range. Determined to return as a stronger and leaner company, Under Armour went to the drawing board in 2020.
The company devised a multi-pronged approach that includes broadening its appeal in popular categories like running, relaunching an improved North American digital channel, implementing supply constraints to better align distribution with demand, and a $550 million restructuring program.
Although sales growth remained elusive during the pandemic, early signs emerged last year that the comeback plan was working. Most notably, gross margin returned to around 49%.
When Under Armour reported strong first quarter earnings on May 4, 2021, it became evident that the turnaround was fully in motion. The upswing in performance caught analysts off-guard as EPS of $0.16 and revenue of $1.3 billion easily exceeded the $0.04 and $1.12 billion forecasts.
More importantly, its North America business rebounded with a 32% sales increase, while the e-commerce channel generated Nike-like growth of 69%, thanks to improved personalization capabilities. Additionally, gross margin jumped by 370 basis points year over year to 50%.
The company believes this is just the beginning of its resurgence as it lifted its FY21 revenue growth forecast to a high-teen percentage range compared to its prior expectation of a high-single-digit rate increase.
Under Armour still has plenty of work ahead, but it's in a better position to go toe-to-toe with Nike again. This improved competitive standing should have Under Armour's beleaguered investors enjoying a comeback of their own, too.