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Summary

  • Under Armour has grown significantly in Football, Running, Fitness, Women’s Apparel, Soccer, and other areas.
  • After 4 years in the space, basketball has seen limited growth in both overall market share and as a portion of total revenues, coming in at .25% and 1%, respectively.
  • Under Armour’s failure to sign Durant shows their failure to appeal to not only Durant, but the overall basketball market.
  • Management should consider reallocating capital towards areas in which Under Armour already holds solid market share.

Shares of Under Armour (NYSE:UA) tumbled Friday as it was announced that Nike would retain the Oklahoma Thunder forward and NBA MVP Kevin Durant in a deal upwards of $300M over the next ten years according to the WSJ. While some report that Nike (NYSE:NKE) apparently matched or beat Under Armour's previous offer, it is not certain yet whether this is true. ESPN business reporter Darren Rovell stated,

I just think that Nike had to come close… I've been told that Nike did not necessarily match, but they did enough for Kevin Durant to say, 'I'm coming back to you.'

This should not only be a warning shot to UA investors, but to management. While Under Armour's basketball shoe sales were at $299 million the past year, Durant generated $175 million of retail sales last year for Nike. The question is, are consumers buying Nike KD's because of Kevin Durant or because of Nike? While no doubt some are, I believe the majority are Nike customer's first, Durant fans second. In the basketball shoe space, Nike already owns Jordan, LeBron, Kobe and now has retained KD. There is simply no room for Under Armour to grow in this space right now when it comes to meaningful endorsements.

Although Under Armour has grown quickly, management needs to focus on what it has been doing well and abandon the basketball shoe space for now. Under Armour's deals with Navy and Notre Dame football as well as the Premier League's Tottenham are good examples of areas in which Under Armour has been succeeding and are areas that they should continue to focus on in terms of partnerships and endorsements. The basketball market consists of a measly 1% of sales, having gained only .25% market share over 4 years.

The basketball market is a highly profitable area in which Nike simply dominates. While there could be a time in which Under Armour takes market share from Nike in that space, that time is not now. Those who rise quickly also fall quickly, and Under Armour should first focus on solidifying their market share in areas like football, running, fitness, soccer, and women's apparel. The market is currently justifying Under Armour's growth prospects with a P/E ratio just above 88. However, if management fails to make changes, UA will begin to lose market share in other areas they have worked so hard to gain, and shares of UA will not only tumble based on that fact, but upon the fact that growth prospects are now dimmer.

Source: Under Armour: What Management Should Learn From KD's Decision To Stay With Nike