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.
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%
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.