Under Armour’s ‘less is more’ strategy boosts profits and sends stock up 10%

Under Armour has been making a concerted effort to restore its premium aura, even if it has meant temporarily sacrificing some sales. The strategy appears to be paying off: It led to a surprise profit last quarter, the company announced on Wednesday, and it sets the sportswear brand up well for a comeback in consumer spending this year.

A few years ago, Under Armour was rising but undisciplined, with too much of its merchandise ending up at outlet stores or off-price chains like T.J. Maxx and Ross. The company chased sales by selling its wares at a big number of wholesale stores that made little effort to present Under Armour well, and its lackluster inventory management led to a lot of merchandise needing to be sold at clearance pricing.

The result was a weakened brand that struggled to compete with the Nike juggernaut, the ascendant Lululemon Athletica, and a resurgent Adidas. Now, after a few years of effort, only 4% of Under Armour is sold at discount stores, the company said on Wednesday, adding that this was the right level.

But it is also working to reduce its exposure to weak retailers. Later in 2021, Under Armour plans to start withdrawing from as many as 3,000 stores other than its own in North America, exiting retail locations that sell its products with what it calls “undifferentiated” presentation. By the end of 2022, that would leave its wholesale presence at 10,000 stores.

Under Armour executives told Wall Street on a conference call that these efforts are paying off and will continue to. Even though that means the company will sacrifice some business, the approach will ultimately make its sales more profitable. That is already happening: In the last quarter of 2020, the ’s gross profit margin rose 2.1 percentage points, to 49.4% of sales.

The company also reported a surprise quarterly profit, sending shares up 10% in midday trading to their highest level in more than a year.

“We will continue to constrain demand in 2021, a decision that as discussed in previous calls may affect our ability to drive top-line volume,” said Patrik Frisk, the CEO who took over from Under Armour founder Kevin Plank in 2019 at a time of internal turmoil. “We are confident that this focus will help elevate our premium positioning,” he added.

In 2020, Under Armour’s wholesale revenue fell 25% to $2.4 billion, but sales at its own stores or on its website rose 2% to $1.8 billion, fueled by a 40% gain in e-commerce sales. Its digital business is now almost as large as business at its own stores. And that direct-to-consumer revenue in all will grow as a percentage of business as Under Armour reduces its wholesale accounts.

In many ways, Under Armour’s strategy mirrors that of brands like Nike, Levi Strauss, and Tapestry’s Coach, among others. Each is selling a bigger percentage of their wares directly to consumers and less via other companies like department stores.

The company expects revenue to bounce back in 2021, rising by a high-single-digit percentage after declining 15% last year. And now, having cleaned up a lot of its prior mess, Under Armour is poised to more fully take advantage of the fitness boom that has buoyed brands from Nike and Adidas to Brooks Running and Athleta.

“There’s also been a resurgence in terms of fitness, personal fitness and general wellness,” said Frisk.

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