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Under Armour Needs A New Sales Channel Mix To Compete Effectively

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Channel mix

A key factor affecting Under Armour’s (UA) profitability in the first nine months of 2014 is a lower percentage of Direct-to-Consumer (or DTC) sales. These include sales through the company’s own stores and e-commerce websites. Sales through the wholesale channel, on the other hand, include sales through other retailers such as Dick’s Sporting Goods (DKS), Foot Locker (FL), and Finish Line (FINL). Dick’s Sporting Goods and Sports Authority are two of Under Armour’s largest customers, comprising 22% of the company’s net revenues in 2013.

Due to the nature of direct sales to consumers, sales through DTC channels earn higher margins. Despite a higher store count and higher online sales, the percentage of sales through the DTC channel came down to 27.1% in the first nine months of 2014, compared to 30% in 2013.

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Profitability impact of wholesale channels

Another major factor for Under Armour is maintaining its thrust on the wholesale channel. Under Armour competes for retail space with other sports brands like market leader NIKE (NKE), VF Corp (VFC), Adidas (ADDYY), and Skechers (SKX). Its share of the “footwear wall” is particularly critical, as NIKE (NKE) captured 60% of the US footwear market. Better displays and a bigger share of retail space at other retailers would help Under Armour expand its market share. The wholesale channel is still its largest channel by far, accounting for 70% of sales in the first nine months of 2014.

While NIKE (NKE), Lululemon Ahletica (LULU), and VF Corp (VFC) try to expand their margins by a higher thrust on DTC, it isn’t as cut-and-dried for Under Armour (UA). Wholesale channel growth will be vital. In a trade-off between revenue growth and expanding margins, this strategy will spur revenues but impact the company’s profitability with respect to it peers.

Distributors

Another factor that affects profitability is the distributorship model that Under Armour is pursuing overseas. Most sales in newer markets are made via distributors, which earn even lower margins than the wholesale channel. As the international segment is poised for significant growth in the future, this could impact the company’s margins further.

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