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Morningstar | We Think No-Moat Under Armour Will Struggle to Carve Out an Edge in Global Markets

We view Under Armour as lacking an economic moat given its failure to amass a competitive advantage over other athletic apparel firms. Between 2008-16, Under Armour’s North American sales (around 70% of its consolidated base) increased to $4 billion from $800 million and it passed narrow-moat Adidas as the region’s second-largest athletic apparel brand (after wide-moat Nike). Between 2016-18, however, Adidas’ North American revenue increased 36% while Under Armour’s fell 7%. Under Armour has suffered as its wholesale distribution through sporting goods stores has declined in a weak market for performance gear. Sales through the largest sporting goods chain in the U.S., no-moat Dick’s Sporting Goods, have fallen so much it’s no longer a 10% vendor. We think Under Armour has fallen behind on innovation and its product is not sufficiently differentiated. Under Armour will introduce new product in 2020, but we’re uncertain of market reception.Under Armour’s direct-to-consumer business is growing as its wholesale business has struggled. Sales through direct-to-consumer channels increased to $1.8 billion (35% of total sales) in 2018 from $1.5 billion in 2016 (31%). Under Armour has opened its own stores as wholesale distribution has slowed. It operated 163 factory house (mostly in outlet malls) and 16 brand house stores in North America in 2018. We expect direct-to-consumer revenue to increase to 38% of total revenue in 2023 from 35% in 2018. While we think this strategy allows Under Armour better control over its brand, we do not see evidence that it allows for premium pricing and we see it as a defensive move.We think Under Armour’s international segment will produce growth, but the firm faces significant competition from global and native operators with established brands and distribution networks. The company estimates its opportunity in Asia-Pacific and EMEA at a combined $54 billion. As Under Armour generated only $904 million in revenue in these regions in 2018, we think it has room for growth. Under Armour, though, lacks the retail partnerships and marketing power of Nike and Adidas, which could impede its ability to carve out a meaningful share position.