Why Under Armour’s Profitability Is Declining



Cost analysis

While revenues and earnings have grown for Under Armour (UA), costs too have shown an upward trend. Its cost of goods sold, which includes manufacturing costs, rose by 30.2% to $1.1 billion in the first nine months of 2014. Despite the higher costs, profitability improved for Under Armour, and its gross margin expanded from 47.7% to 48.7%, year-over-year.

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Marketing costs pinch

Selling, general, and administrative (or SG&A) costs rose even more, by 38.5% to $858 million. Selling and marketing costs were notably higher, due to a number of factors:

  • The company initiated higher sports sponsorship expenses.
  • Marketing campaigns, such as the “I WILL WHAT I WANT” campaign targeted at women, was launched in August 2014. It features ballet star Misty Copeland, skier Lindsey Vonn, and model Gisele Bündchen, among others.
  • Under Armour also launched in a number of international markets in 2014, notably Brazil, Chile, and Hong Kong. This international marketing expansion led to higher marketing costs.
  • The company had higher costs associated with the rollout of its Direct-to-Consumer (or DTC) businesses, both in North America and international operations.
  • The company shouldered higher product innovation and supply chain costs.

Higher SG&A expenses took their toll on Under Armour’s profitability. Operating profit margins contracted from 10.1% in the first nine months of 2013 to 9.5% in the comparable period of 2014.

Peer group comparison

In the trailing twelve months to September 30, 2014, UA’s operating income margin came in at 10.7%, slightly lower than the peer group in the chart above. Lululemon Athletica (LULU) had the highest margin at 21.7%, followed by VF Corp (VFC) at 14.7%, NIKE (NKE) at 13.5%, and Deckers (DECK) at 12.2%. Puma (PMMAF) and Adidas (ADDYY) reported the lowest margins at 5.3% and 6.7%, respectively. Other competitors such as Skechers (SKX) and Columbia Sportswear (COLM) both reported margins of 8.6%

Profitability drivers

These factors, especially marketing costs, could further affect Under Armour’s profitability in the fourth quarter of 2014. You’ll read about the full year costs and profitability outlook in Parts 8 and 9 of this series. The next article discusses the impact of selling channels on profitability.


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