Under Armour's Success and Risk Factors
Under Armour's financial strategy in 2016 focused on increasing company revenues through product diversification and international market penetration (Under Armour, 2016). This requires heavy investment in marketing, distribution channels, and product innovation, which might be at the cost of short-term profitability. On the other hand, strategic priorities were increasing innovations, increasing sponsorships and endorsement deals, and expanding direct-to-consumer channels such as the e-commerce platform, which is rapidly rising (Under Armour, 2016). These strategies impact accounting procedures and business decisions in multiple ways. For example, with the increased focus on global expansion, cost management might shift from efficiency to scalability to meet the rising demand. Also, focusing on growth can increase the financial risks if the costs increase at a faster rate than the revenues. The general impact of a growth mindset on business success is that it will strengthen Under Armour’s brand but may increase short-term risks such as profitability margin pressure.
However, the firm adopts an aggressive risk approach, often prioritizing long-term success over short-term gains.
Under Armour can better leverage its physical facilities to increase its visibility and expand direct-to-customer sales. As of 2016, the company was outsourcing the production process to third parties in Asian countries, which increased inefficiencies and might lead to delays. Accordingly, the brand can invest in local distribution hubs to reduce shipping times by streamlining inventory management. This would result in increased efficiency and reduced costs, hence higher margins and customer satisfaction. Furthermore, this would help enhance the direct-to-customer (DTC) segment of the company. In 2016, the DTC segment accounted for 31% of the revenues, and the company is working to increase this segment, which is its fastest growing (Under Armour, 2016). According to Business Market Insights (2022), the
Asian market for apparel and sportswear was estimated to increase by a compounded annual growth rate (CAGR) of 10.25% between 2016 and 2028, creating a huge market potential for Under Armour. The company should increase its physical stores in large cities like Tokyo to increase visibility and expand its presence in Asian e-commerce platforms. Using the physical facilities to increase the DTC segment would result in higher margins for the company (Kestenbaum, 2020).
The company is currently facing a high risk of production disruption because it outsources most of the production process to third parties. Dependence on external suppliers and producers increases the risk of disruption caused by natural disasters, political conflicts, labor strikes, and global pandemics. This would result in delayed production and loss of potential sales opportunities. For example, Nike, a direct competitor of Under Armour, experienced production disruptions in 2014 after workers in one of its contracted companies in China engaged in a strike (AFP, 2014). Furthermore, such strikes often lead to an increase in wages, hence an unprecedented increase in production costs. Therefore, moving forward, the company needs to invest in in-house production to mitigate such risks.
Projections
In the past five years, Under Armour has maintained a CAGR of 27% for revenues (Under Armour, 2016). It is therefore assumed that the company will maintain this growth in the next three years, considering its aggressive international expansion, product innovation, and diversification strategies. Ratio-based forecasting was then used for other items in the consolidated income statement. For example, the cost of goods sold was 0.536% of revenues across three periods, 0.377% for expenses, 0.00548% for interest expense, and 0.00057 for other expenses, as shown in the appendix.
