Since September 14, 2012, when Under Armour (NYSE:UA) closed at its 52 week high of $60.03 and through the last close of $48.26, over $1 billion in market cap has been wiped out. However, up to an additional $1 billion in market cap will be lost in the wake of the 4 obstacles confronting Under Armour. Ultimately, UA may implode and become another K-Swiss unless management makes significant changes that include focusing on brand management instead of product management, replacing its board with people experienced in brand management and who have an international perspective, and letting go of a marketing campaign that no longer serves the brand's or the company's needs.
This analysis is primarily qualitative. However, the implications of the conclusion are quantitative and financially significant.
The 4 obstacles are:
- The CHARGE basketball shoe
- The retirement of Ray Lewis
- A directionless brand
- A rubber-stamp board
A closer look at each obstacle:
The basketball shoe
UA waved the white flag when Gene McCarthy (former Sr. V.P. of footwear) announced, on January 24, 2013, his retirement. This is the clearest articulation by Kevin Plank that the foray into basketball shoes has been an unmitigated disaster. The CHARGEBB has failed to change the game as promised. Accordingly, Mr. Plank sits on the horns of a dilemma and faces the most critical decision of his tenure: whether to abandon the CHARGE and, pardon the pun, reboot or to stick with the CHARGE in the hopes that some outside force or new executive may reverse its fortunes.
If Mr. Plank decides to abandon the CHARGE and start all-over again, UA will have to take a charge of somewhere between, my best guess is, $100 and $200 million for all of the expenses associated with its development, marketing, and returned inventory.
On the other hand, if Mr. Plank decides to stick with CHARGE, then he has to be confident that, with no momentum to speak of since its introduction, the shoe will ultimately succeed. The marketing costs to jump start sales of CHARGE are very high and will increase as the probability of failure increases the longer the shoe languishes in the market. UA will need to "steal" a high profile NBA player from either Nike or Adidas (coming off contract) to give the CHARGE badly needed street cred, as Brandon Jennings does not have the name recognition of either a Chris Paul or a Blake Griffin or a Carmelo Anthony. But the costs of outbidding Nike or Adidas and imposing a "Wow!" or "cool factor" upon consumers are prohibitive and rarely, if ever, successful, and would only put additional pressure on UA's shrinking margins.
Management's strategic error was trying to extend UA's reputation for innovation in performance apparel into the basketball shoe category, where the ill-conceived design (it looks more like a wrestler's shoe) has the features and benefits of the technology built into the shoe. Most importantly, the shoe lacked the necessary "cool" or "Wow!" factor. Even the ad on the website admitted as much: The last line of the ad is "It doesn't work 'cause it looks like this. It looks like this 'cause it works."
Ballers are only interested in innovation when innovation demonstrably improves their game or enhances their street cred and, in an ideal world, both. Unless UA had data to support any claims, such as "Brandon Jennings jumps 10% higher because he wears the CHARGEBB," the effort spent in the ad to explain away the strange look of the shoe was wasted.
Management's strategic error was trying to extend UA's innovation in performance apparel into the basketball shoe category, where there was no clear need or demand for innovation. In other words, the basketball shoe design innovation was contrived compared to the original innovation in performance apparel, which was purely organic. Consumers are smart enough to know the difference.
UA's board of directors must also share some of the blame. Did anyone question, on a gut level, the appeal of the design or ask for focus group data that showed overwhelmingly that the target consumer was "wowed" by the design. A board is supposed to push back when it thinks management may be straying either from mission, strategy, or execution. Given the board's makeup (one of the other obstacles to be discussed later) it is doubtful that the board pushed back on UA senior management.
The retirement of Ray Lewis
Just days after UA announces its quarterly results, Ray Lewis will retire from the NFL at the conclusion of the Super Bowl on February 3, 2013. Whether the Ravens win and Ray Lewis is crowned MVP for the second time while dancing mid-field or the Ravens lose and Ray Lewis quietly shuffles off to Buffalo matters less than what happens to the UA brand without the face, voice and passion from the man who gave life to the original "Protect this house" campaign and continues to give life to the current marketing campaign of "Protect this house. I will." Can Tom Brady or anyone else carry the marketing mantle being forcibly passed on to them by UA management?
Unfortunately, without a plan to seamless transition the UA brand into the post-Ray Lewis era, it appears that management has ridden the "Protect this house" horse far too long. While the company, its products offerings and position in the marketplace has evolved, its marketing campaign has not.
Management's continued support of and lack of long-term thinking of the viability about the "Protect this house." campaign raises several issues about the underlying strength of the UA brand itself.
A Directionless Brand:
1. UA is in need of a Nikeesque "Just Do It." campaign.
"Just Do It" singlehandedly increased Nike's market share of athletic footwear from 18% to 43% and solidified its leadership position. "Protect this House. I will" is not even close to being in the same league as "Just Do It." The positioning statement itself is limited in both its appeal and, more importantly, in its interpretation. On the other hand, "Just Do It" had wide appeal while being open to the individual's personal interpretation for self-motivation and, thus, provided a long-lasting emotional connection between the Nike brand and the consumer.
2. Legendary ad executive and marketing expert Donny Deutsch defines a great brand as a "shared value system."
There are no easily defined core values associated with the UA brand. Without core values that consumers associate with the brand, consumer purchases will be based solely on product innovation and design, which the competition (i.e. Nike, Adidas) can easily copy and re-brand. After billions of dollars in sales, it is difficult to discern exactly what the UA brand stands for. Without core values, the consumer's purchase is more likely to be whimsical and consumer loyalty fleeting. (Ask senior management during the conference call on January 31st, "What are the core values of the UA brand?" and carefully note the response.)
3. There is no positioning statement or marketing campaign that unifies the UA brand, products,and stable of athletes.
While there are a lot of secondary messages, per brand per product category, they do not help the consumer connect the dots between the vast array of UA products and brands. If there were an overarching positioning statement that unified the brands and products, the sales per customer would increase significantly. An overarching positioning statement would reinforce in the consumer's mind that the UA brand is a "one-stop" shopping experience from head-to-toe.
4. The current campaign, "Protect this house. I will" is not a campaign that will resonate as well with consumers once Ray Lewis retires.
It was created years ago around the persona of Ray Lewis, who was at the time UA's most recognized athlete. While the campaign must be credited for generating buzz and brand awareness, it is far too colloquial and does not connect well with athletes that participate in singular sports such as skiing or golf or with the weekend warrior that does not have "a house to protect."
Even though Tom Brady is a highly recognized UA athlete, he does not have the same persona as Ray Lewis and lacks the gravitas to give "Protect this house. I will" the same import as Ray Lewis. However, even if Tom Brady did, UA has not indicated to the market that there are plans for a seamless transition.
5. If the international market is UA's next best opportunity, then the "Protect this house. I will." campaign does not translate well (grammatically or meaning) into other languages.
The spirit of "Protect this house. I will" is very American. Accordingly, UA will be forced to come up with unique campaigns for separate markets beyond North America. Therefore, its costs of marketing will increase dramatically while UA's margins will equally decrease.
6. The lack of core values for the brand and a unifying marketing campaign gave way to the ill-fated basketball shoes. This mistake is likely to be repeated again and again until senior management understands the difference between brand management and product management.
7. The UA brand is underperforming in the social media environment.
UA has 154,000 followers on Twitter compared to Nike's 864,000 followers. UA has 2.2 million likes on Facebook compared to Nike's 11 million. This is highly indicative that the UA brand does not have a shared value system that consumers have bought into for the long-term. One would think that UA, the younger brand, would have leveraged social media more effectively than Nike, a much older brand. The social media gap between UA and Nike is only likely to widen.
Again, the board of directors must assume some responsibility for the brand's lack of direction. Did anyone on the board question the wisdom of simply adding "I will" to the "Protect this house" campaign? Did any ask for the results of focus groups that compared "Protect this house" to other campaigns? Was an RFP requested by the board to have other agencies offer new creatives for the UA brand direction and strategy? Given the lack of creativity associated with transitioning from "Protect this house" to "Protect this house. I will," the answer is likely "no," which gives rise to the fourth and challenge:
The Rubber-Stamp Board
Simply put, the track record and composition of UA's current board of directors, a Hydra of people, personalities, and experience, does not match the needs and aspirations of the company or Kevin Plank. The current board, by not questioning or pushing back on several key and ill-fated decisions by senior management, is doing a disservice to UA. This board, as currently composed, should not survive any longer than necessary to find people with perspectives, experiences, and proven track records to replace the current members.
Most notably, the UA board needs people with senior brand management experience and meaningful international business experience. Someone like Carlos Guitierrez comes to mind. However, there are search firms that specialize in the recruitment of board members that could help find the right people to fill a board to help Kevin Plank and UA meet its needs and realize its aspirations.
In conclusion, while Under Armour is clearly faces four formidable obstacles, its demise is not inevitable. However, Kevin Plank and a new board must make some significant and difficult decisions in the near-term to avoid the long-term effects caused by the presence of these obstacles. Without some new thinking about the UA brand and what it stands for along with a renewed focus on brand management rather than product management, instead of UA becoming a viable threat to Nike, it will soon become Nike roadkill.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.