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/n case 2 Under Armour's Strategy in 2013-Good Enough to Win Market Share from Nike and adidas? connect ARTHUR A. THOMPSON The University of Alabama Founded in 1996 by former University of Maryland football player Kevin Plank, Under Armour was the originator of performance apparel-gear engineered to keep athletes cool, dry, and light throughout the course of a game, practice, or workout. It started with a simple plan to make a T-shirt that provided compres- sion and wicked perspiration off the wearer's skin, thereby regulating body temperature and avoiding the discomfort of sweat-absorbed apparel. Founder and CEO Kevin Plank believed Under Armour's potential for long-term growth was exceptional for three reasons: (1) the company had built an incredibly powerful and authentic brand in a relatively short time, (2) there were significant opportunities to expand the company's narrow product lineup and brand-name appeal into prod- uct categories where it currently had little or no market presence, and (3) the company was only in the early stages of establishing its brand and pen- etrating markets outside North America. Some 15 years later, with 2012 sales of $1.8 bil- lion, Under Armour had a growing brand pres- ence in the roughly $60 billion multi-segment Company Background retail market for sports apparel, activewear, and athletic footwear in the United States. Its inter- locking "U" and "A" logo had become almost as familiar and well-known as industry-leader Nike's swoosh. According to SportsOneSource data, in 2012 Under Armour had a 7 percent share of the U.S. market for lightweight run- ning shoes (up from 3 percent in 2011) and a 13.7 percent share of the sports apparel segment (versus 11.1 percent in 2011). Across all seg- ments, Under Armour had boosted its domes- tic market share from 0.6 percent in 2003 to an estimated 3.0 percent in 2012, while industry leader Nike's share had remained relatively flat at about 7.0 percent; second-ranked adidas had a market share of about 5.4 percent in 2012.¹ 248 Kevin Plank honed his competitive instinct growing up with four older brothers and play- ing football. As a young teenager, he squirmed under the authority of his mother, who was the town mayor of Kensington, Maryland. When he was a sophomore, he was tossed out of Georgetown Prep for poor academic perfor- mance and ended up at Fork Union Military Academy, where he learned to accept disci- pline and resumed playing high school football. After graduation, Plank became a walk-on special-teams football player for the University of Maryland in the early 1990s, ending his col- lege career as the special-teams' captain in 1995. Copyright ©2013 by Arthur A. Thompson. All rights reserved. Case 2 Under Armour's Strategy in 2013-Good Enough to Win Market Share from Nike and adidas? Throughout his football career, he regularly expe- rienced the discomfort of practicing on hot days and the unpleasantness of peeling off sweat- soaked cotton T-shirts after practice. At the Uni- versity of Maryland, Plank sometimes changed the cotton T-shirt under his jersey as it became wet and heavy during the course of a game. During his later college years and in classic entrepreneurial fashion, Plank hit upon the idea of using newly available moisture-wicking, polyester-blend fabrics to make next-generation, tighter-fitting shirts and undergarments that would make it cooler and more comfortable to engage in strenuous activities during high- temperature conditions.² While Plank had a job offer from Prudential Life Insurance at the end of his college days in 1995, he couldn't see himself being happy working in a corporate environment-he told the author of a 2011 For- tune article on Under Armour, "I would have killed myself."³ Despite a lack of business train- ing, Plank opted to try to make a living selling high-tech microfiber shirts. Plank's vision was to sell innovative, technically advanced apparel products engineered with a special fabric con- struction that provided supreme moisture man- agement. A year of fabric and product testing produced a synthetic compression T-shirt that was suitable for wear beneath an athlete's uni- form or equipment, provided a snug fit (like a second skin), and remained drier and lighter than a traditional cotton shirt. Plank formed KP Sports as a subchapter S corporation in Mary- land in 1996 and commenced selling the shirt to athletes and sports teams. The Company's Early Years Plank's former teammates at high school, mili- tary school, and the University of Maryland included some 40 National Football League players that he knew well enough to call and offer them the shirt he had designed. He worked the phone and, with a trunk full of shirts in the back of his car, visited schools and training camps in person to show his products. Within a short time, Plank's sales successes were good enough that he convinced Kip Fulks, who played lacrosse at Maryland, to become a 2 partner in his enterprise. Fulks's initial role wa to leverage his connections to promote use the company's shirts by lacrosse players. The: sales strategy was predicated on networkin and referrals. But Fulks had another critica role he had good credit and was able to obtai 17 credit cards that were used to make purchase from suppliers and charge expenses. * Opera tions were conducted on a shoestring budge out of the basement of Plank's grandmother' house in Georgetown, a Washington, D.C., sub urb. Plank and Fulks generated sufficient casł from their sales efforts that Fulks never missec a minimum payment on any of his credit cards When cash flows became particularly tight Plank's older brother Scott made loans to the company to help keep KP Sports afloat (in 2011 Scott owned 4 percent of the company's stock). It didn't take long for Plank and Fulks to learn that it was more productive to direct their sales efforts more toward equipment managers than to individual players. Getting a whole team to adopt use of the T-shirts that KP Sports was marketing meant convincing equipment man- agers that it was more economical to provide players with a pricey $25 high-performance T-shirt that would hold up better in the long- run than a cheap cotton T-shirt. In 1998, the company's sales revenues and growth prospects were sufficient to secure a $250,000 small-business loan from a tiny bank in Washington, D.C.; the loan enabled the com- pany to move its basement operation to a facil- ity on Sharp Street in nearby Baltimore. As sales continued to gain momentum, the bank later granted KP Sports additional small loans from time to time to help fund its needs for more working capital. Then Ryan Wood, one of Plank's acquaintances from high school, joined the company in 1999 and became a partner. The company consisted of three jocks trying to gain a foothold in a growing, highly competitive industry against more than 25 brands, includ- ing those of Nike, adidas, Columbia, and Pata- gonia. Plank functioned as president and CEO; Kip Fulks was vice president of sourcing and quality assurance; and Ryan Wood was vice president of sales. 250 Part 2 Cases in Crafting and Executing Strategy Nonetheless, KP Sports sales grew briskly as the company expanded its product line to include high-tech undergarments tailored for athletes in different sports and for cold tempera- tures as well as hot temperatures, plus jerseys, team uniforms, socks, and other accessories. Increasingly, the company was able to secure deals not just to provide gear for a particular team but also for most or all of a school's sports teams. However, the company's partners came to recognize the merits of tapping the retail mar- ket for high-performance apparel and began making sales calls on sports apparel retail- ers. In 2000, Galyan's, a large retail chain since acquired by Dick's Sporting Goods, signed on to carry KP Sports' expanding line of performance apparel for men, women, and youth. Sales to other sports apparel retailers began to explode, quickly making the retail segment of the sports apparel market the biggest component of the company's revenue stream. Revenues totaled $5.3 million in 2000, with operating income of $0.7 million. The company's products were available in some 500 retail stores. Beginning in 2000, Scott Plank, Kevin's older brother, joined the company as vice president of finance, with operational and strategic responsibilities as well. Rapid Growth Ensues Over the next 11 years, the company's product line evolved to include a widening variety of shirts, shorts, underwear, outerwear, gloves, and other offerings. The strategic intent was to grow the business by replacing products made from cotton and other traditional fabrics with innovatively designed performance products that incorporated a variety of technologically advanced fabrics and specialized manufactur- ing techniques, all in an attempt to make the wearer feel "drier, lighter, and more comfort- able." In 1999 the company began selling its products in Japan through a licensee. On Janu- ary 1, 2002, prompted by growing operational complexity, increased financial requirements, and plans for further geographic expansion, KP Sports revoked its S corporation status and became a C corporation. The company opened a Canadian sales office in 2003 and began efforts to grow its market presence in Canada. In 2004, KP Sports became the outfitter of the University of Maryland football team and was a supplier to some 400 women's sports teams at NCAA Division I colleges and universities. The company used independent sales agents to begin selling its products in the United King- dom in 2005. SportsScanINFO estimated that as of 2004, KP Sports had a 73 percent share of the U.S. market for compression tops and bot- toms, more than seven times that of its nearest competitor. Broadening demand for the company's product offerings among professional, colle- giate, and Olympic teams and athletes; active outdoor enthusiasts; elite tactical profession- als; and consumers with active lifestyles pro- pelled revenue growth from $5.3 million in 2000 to $263.4 million for the 12 months end- ing September 30, 2005, equal to a compound annual growth rate of 127 percent. Operating income increased from $0.7 million in 2000 to $32.7 million during the same period, a com- pound annual growth rate of 124 percent. About 90 percent of the company revenues came from sales to some 6,000 retail stores in the United States and 2,000 stores in Canada, Japan, and the United Kingdom. In addition, sales were being made to high-profile athletes and teams, most notably in the NFL, Major League Base- ball, the National Hockey League, and major collegiate and Olympic sports. KP Sports had 574 employees at the end of September 2005. Throughout 2005, KP Sports increased its offerings to include additional men's and women's performance products and, in par- ticular, began entry into such off-field outdoor sports segments as hunting, fishing, running, mountain sports, skiing, and golf. Management expected that its new product offerings in 2006 would include football cleats. KP Sports Is Renamed Under Armour In late 2005, the company changed its name to Under Armour and became a public company Case 2 Under Armour's Strategy in 2013-Good Enough to Win Market Share from Nike and adidas? 2 with an initial public offering of 9.5 million shares of Class A common stock that gener- ated net proceeds of approximately $114.9 mil- lion. Simultaneously, existing stockholders sold 2.6 million shares of Class A stock from their personal holdings. The shares were all sold at just above the offer price of $13 per share; on the first day of trading after the IPO, the shares closed at $25.30, after opening at $31 per share. Following these initial sales of Under Armour stock to the general public, Under Armour's outstanding shares of common stock consisted of two classes: Class A common stock and Class B common stock; both classes were identical in all respects except for voting and conver- sion rights. Holders of Class A common stock were entitled to one vote per share, and hold- ers of Class B common stock were entitled to 10 votes per share on all matters to be voted on by common stockholders. Shares of Class A and Class B common stock voted together as a single class on all matters submitted to a vote of stockholders. All of the Class B common stock was beneficially owned by Kevin Plank, which represented 83 percent of the combined voting power of all of the outstanding common stock. As a result, Plank was able to control the out- come of substantially all matters submitted to a stockholder vote, including the election of direc- tors, amendments to Under Armour's charter, and mergers or other business combinations. operating officer at Under Armour in Septen ber 2011, after moving up the executive ranl in several capacities, chiefly those related t sourcing, quality assurance, product develop ment, and product innovation. In Septembe 2012, Scott Plank, who was serving as the con pany's executive vice president of busines development after holding several other pos tions in the company's executive ranks, retire from the company to start a real estate devel opment company and pursue his passion fo building sustainable urban environments. Exhibit 1 summarizes Under Armour' financial performance in five of the seven year: following the company's 2005 IPO. Exhibit: shows the growth of Under Armour's quar terly revenues for 2010 through mid-2013. The company's stock traded in the $46 to $51 range in the first three months of 2013. Following the announcement of better-than-expected earn- ings in the first half of 2013 and management forecasts of full-year 2013 revenues of $2.21 billion to $2.23 billion, Under Armour's stock climbed to $57 per share in mid-April 2013. Under Armour announced sales target was to achieve sales revenues of $2.2 billion in 2013, reaching $4 billion by 2016. Under Armour's At the time of Under Armour's IPO, Kevin Strategy Plank, Kip Fulks, and Ryan Wood were all 33 years old; Scott Plank was 39 years old. After the IPO, Kevin Plank owned 15.2 million shares of Under Armour's Class A shares (and all of the Class B shares); Kip Fulks owned 2.125 mil- lion Class A shares, Ryan Wood owned 2.142 million Class A shares, and Scott Plank owned 3.95 million Class A shares. All four had opted to sell a small fraction of their common shares at the time of the IPO-these accounted for a combined 1.83 million of the 2.6 million shares sold from the holdings of various directors, officers, and other entities. Ryan Wood decided to leave his position as senior vice president of sales at Under Armour in 2007 to run a cattle farm. Kip Fulks assumed the position of chief Under Armour's mission was "to make all ath- letes better through passion, design, and the relentless pursuit of innovation." The compa- ny's principal business activities in 2012 were the development, marketing, and distribution of branded performance apparel, footwear, and accessories for men, women, and youth. The brand's moisture-wicking fabrications were engineered in many designs and styles for wear in nearly every climate to provide a perfor- mance alternative to traditional products. Its products were worn by athletes at all levels, from youth to professional, and by consum- ers with active lifestyles. Over 90 percent of Under Armour's sales were in North America, but international sales to distributors and 252 Part 2 Cases in Crafting and Executing Strategy EXHIBIT 1 Selected Financial Data for Under Armour, Inc., 2008-2012 (in 000s, except per share amounts) Years Ending December 31 2012 2011 2010 2009 2008 Selected Income Statement Data Net revenues $ 1,834,921 $ 1,472,684 $ 1,063,927 $ 856,411 $ 725,244 Cost of goods sold 955,624 759,848 533,420 446,286 372,203 Gross profit 879,297 712,836 530,507 410,125 353,041 Selling, general and administrative expenses 670,602 550,069 418,152 324,852 276,116 Income from operations 208,695 162,767 112,355 85,273 76,925 Interest expense, net (5,183) (3,841) (2,258) (2,344) (850) Other expense, net (73) (2,064) (1,178) (511) (6,175) Income before income taxes 203,439 156,862 108,919 82,418 69,900 Provision for income taxes 74,661 59,943 40,442 35,633 31,671 Net income $ 128,778 $ 96,919 $ 68,477 $ 46,785 $ 38,229 Net income per common share Basic $1.23 $0.94 $0.67 $0.47 $0.39 Diluted 1.21 0.92 0.67 0.46 0.38 Weighted average common shares outstanding Basic 104,343 103,140 101,595 99,696 98,171 Diluted 106,380 105,052 102,563 101,301 100,685 Selected Balance Sheet Data Cash and cash equivalents $ 341,841 $ 175,384 $ 203,870 $187,297 $ 102,042 Working capital* 651,370 506,056 406,703 327,838 263,313 Inventories at year-end 319,286 324,409 215,355 148,488 182,232 Total assets 1,157,083 919,210 675,378 545,588 487,555 Total debt and capital lease obligations, 61,889 77,724 15,942 20,223 45,591 including current maturities Total stockholders' equity 816,922 636,432 496,966 399,997 331,097 Selected Cash Flow Data Net cash provided by operating activities $ 199,761 $ 15,218 $ 50,114 $ 119,041 $ 69,516 *Working capital is defined as current assets minus current liabilities. Source: Company 10-K reports 2012, 2010, and 2008. retailers outside the North America were grow- ing. Exhibit 3 shows the composition of Under Armour's revenues from 2009 to 2012. Growth Strategy Under Armour's announced sales objective was to achieve sales revenues of $4 billion by 2016, up from an estimated $2.2 billion in 2013. The company's growth strategy in 2013 con- sisted of several strategic initiatives: Continuing to broaden the company's product offerings to men, women, and youth for wear in a widening variety of sports and recreational activities.