Why Under Armour’s Slowing Footwear Growth Should Concern Investors

April 27, 2017, 1:47 PM UTC

Strong apparel sales helped Under Armour post better-than-expected sales for the first quarter of 2017, though a lackluster response to NBA star Stephen Curry‘s most recent footwear collection hurt that business.

Under Armour’s (UAA) stock—which has faced a lot of pressure of late especially after a poor showing during the holiday shopping season—held onto a slim gain in premarket trading on Thursday on steady sales and reiterated 2017 financial targets. The big concern investors have focused on: can Under Armour, a fast-growing athletic gear purveyor, create a premium brand with high price points like its larger rivals Nike (NKE) and Adidas (ADDYY)? Wall Street investors aren’t yet convinced, but Under Armour executives think they are well on their way.

“We feel very good about the evolution of our brand’s strength and the ability to gain share in key markets and categories,” said CEO Kevin Plank in a conference call presentation to Wall Street analysts.

While apparel sales jumped 7.3%, footwear only grew by 2% to $270 million. Last year, the division posted a 64% surge in revenue growth. That sales slowdown worried Wall Street, as Under Armour first entered the sportswear market as an apparel company and built a sizable business selling shirts and hoodies that became staples for American teens and college students. In more recent years, Under Armour also focused on building a massive footwear business would help it achieve lofty sales goals—including the aspirational target of getting to $7.5 billion by 2018.

“We don’t like it and we don’t accept it,” said Plank, referencing the footwear business. He told analysts that footwear sales growth for 2017 would outperform the overall company’s business. But Plank said that while footwear sales were still firm in international markets, the business hasn’t been as strong in the home.

Under Armour’s issues in footwear allude to the company’s greatest challenge of elevating the brand. Nike and Adidas have massive lifestyle brands that are built on on-trend styles, often worn by celebrities and seen regularly on the pages of fashion magazines. Baltimore-based Under Armour doesn’t yet have a ton of experience in the space, as it has only truly been in the “lifestyle” business for about two years. With a majority of footwear shoes in the U.S. sold for style—not athletic purposes—it is important for brands like Under Armour to get that style component right.

The issues with the Curry 3, which saw softer than expected sales, points to the work Under Armour needs to do. Under Armour wants to make Curry a lifestyle brand like Nike did with Michael Jordan, but that’s easier said than done. Plank touted the strength of the brand, including a partnership with fashion designer Tim Coppens to make Under Armour play more in the premium space. But he also admitted to Wall Street the company hasn’t reached the finish line.

“We are a performance brand,” Plank said, adding that footwear sales have actually been solid for shoes that are sold for sport, including cleat and running shoes. But he added later in the presentation: “Ours won’t be product that just looks better. It all does something.”

Overall, first-quarter revenue increased a better-than-expected 7% to $1.1 billion due to growth abroad. Sales actually dipped 1% in North America as new distribution was more than offset by the absence of shelf space from sports retailers that fell into bankruptcy last year. Under Armour was particularly stung by the closure of Sports Authority and has responded by turning to Kohl’s (KSS) for more shelf space. Like peers Nike and Adidas, it also wants to generate more business from Under Armour’s own stores and website. The direct-to-consumer revenue jumped 13% in the latest period.

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