Under Armour Needs China Market
Investment Thesis
Regardless of the trade war between the US and China, Under Armour’s future is in China. The company is experiencing sales decline in its North America home, but enjoying annual growth in China, which is why, it must ensure to keep its production lines in shape in China to service the most populous nation on earth, instead of reducing it production presence to just 7%.
Trump’s Trade War with China: Effect on Footwear Firms
With the latest tariffs on products from China by US government and reprisal tariffs from the government of China, it seems the world is in for theatrics like never in the history of the global economy.
Although Trump claimed the Chinese economy would feel the brunt, however, in reality, many sectors of the American economy are affected as well, with the American energy industry the last with 5% import duty slammed on it by the Chinese government.
The new tariffs were effective from September 1, 2019, the latest in the trade war, which may cost an average American household $800 per annum. With the 15% duty slammed on goods worth $300 billion, and China’s response with tariffs on American products worth $75 billion and 5% duty on US crude oil, the stage is set for the biggest economic war ever in human history.
Away from the media hullabaloo, let’s take a look at the major sector of America that, may be affected in the economic war between the two biggest economies in the world. The development will have an impact on every family in the United States, regardless of what Mr. Trump claimed, but the financial burden on investors will be worse, with many industries, counting loses in several billions of dollars.
Footwear Industry is Groaning
More than 200footwear companies on 21 August 2019 wrote a letter to President Trump to rescind his purported new tariff that would take effect on the first day of September when the footwear companies would have 15% in new tariffs. The letter read in part, “This added 15% tax will cost U.S. footwear consumers an additional $4 billion every year,” referring to an estimate by the FDRA, Footwear Distributors & Retailers of America, a trade group that championed the letter.
According to Matt Priest FDRA Chief Executive, “Brands have already said tariffs will dent job growth and shoe stores are saying it’s a job killer,” Matt said in a statement. “We hope the president listens to Americans across the country … and stops this unnecessary trade war.” The fear expressed by Priest was the echo of many companies that made up the sector, and an expression of the potential burden, Americans will face in the coming months.
The 15% tariffs come after tariffs that are already between 11% and reaches 67% on some shoes, the companies claimed. The letter signed by industry giants like Foot Locker, Nike, Under Armour and Adidas said the tariff would create hardship in the economy because other nations may not have the capacity to meet their manufacturing needs.
Mr. Trump, in his characteristic style, claimed that China pays for the tariffs, a claim, many US firms rebutted. One of the industries that are to face the agony of the latest tariffs is the footwear sector; where experts claimed the industry would lose more than $4 billion with the new tariffs in effect, however, to bring the statistics home, let’s check what Under Armour (UA, UAA) are likely to experience.
Under Armour
The Baltimore based company is among the firms that are affected by the new tariffs, the company manufactures 61% of its products in Jordan, China, Vietnam, and Malaysia, according to 2017 reports, but 18% of it came from China.
A report claimed virtually all Under Armour Products were sourced outside the shores of the US, with greater percent from Asia, however, the company UA, which sells over 85% of its products in the US, but imports almost all of its products, may be affected by the new tariffs in the short term.
Although the company sources its products abroad with over 154 factories all over the continent, with 35 factories in China, according to the Fair Labor Association that provided the accreditation assessments.
Under Armour efforts to reduce its reliance on China is paying off because, just in 2013, the company sourced over 46% of its products from China, but it was reduced to 18% in 2017, and Colin Browne, the Chief Supply Chain Officer spoke about his company’s determination to further reduce reliance on china in the coming years.
He said the company would source just 7% of its products from China by 2023, Browne later said: “We expect to continue to have production in China.” “I’m going to be completely transparent and we need to continue to have production in China because China as a market for us is going to be important. So we need to still think about how we serve as a local for locals out of China. China is still going to be part of our overall supply chain, but these numbers can change.” The statement is a bold way to say Under Armour can’t close its factories in China, but will try to make it serve local demands in China and possibly, other countries apart from the US.
Under Armour can’t afford to lose the Chinese market, which is referred to in 2017 as “hyper-growth” market because it recorded 61.4% growth in the Asian Pacific, 27.9% in Latin America, while the Middle East, Africa, and Europe contributed 42.2% growth, but the firm struggles on home turf with a decline of 5% in sales.
Under Armour may have to contend with many challenges, in particular, the North American market that is driven by ‘athleisure’ base shoes and clothes. Whereas Under Armour is not ready to sacrifice its performance base designs, no wonder in Q42018, the firm recorded a loss of 6% estimated at $965 million but made gains of 24% ( $395 million) in its international sales with the bulk of its gains from China.
In Q2 2019, the company sales declined by 3% in North America, its largest market and the firm expected the decline to continue to the end of the year. The North America sales were down by 3% to $816m compared to 2018, while international sales offset the deficit in at home at 12% rise at $339m, which represents 28% of its total revenue.
Under Armour, shares plunged by 15% after declaring a 3% decline in sales in July 2019. It’s obvious, Under Armour is struggling to keep pace with its major competitors in North America, where Nike, Lululemon, and Adidas are thriving.
With the new tariffs in place from 1 September, Under Armour woes seem to get another dimension, since the company is not a match for its competitors in North America. It must strive to keep the balance, by keeping its market in China and explore options available to increase sales in Asia to compensate for ‘flat sales’ in its home country.
Performance Gear Designs Hinder UA Sales in North America
UA is experiencing ‘flat sales’ in North America is due to the fact that the company, is too rigid to adapt to fashion-driven, sports-inspired designs that most Americans favor, instead, it tries to improve on its performance-based designs.
Although the shift in Greater China is towards fitness, which is why the company is enjoying the patronage and its market gains are encouraging in China to compare to North America.
UA’s fitness app platform is the biggest in the world and it’s one of its strengths, but it fails to adapt its business, which is responsible for its sneakers business to plunge, ending a decade of growth that resulted in the underperformance in the market as shown above.
It’s no longer news that UA can’t compete with Nike, Adidas, Foot Locker, and Lululemon in North America because of its inability to venture into production of apparel and footwear that the North American market is craving.
Therefore, to keep the makeup for the projected flat sales in America that may even get worse, with the new 15% tariff that will affect all its products in China, UA should consider making products for America away from China to avoid excessive tariffs.
However, reducing its production in China to 7% may not be a good decision, because China is experiencing annual growths, which UA is not having anywhere in the world.
Cutting the production size in China may not be a smart choice, but to explore ways to sell more products in the country.
China is the most populous nation in the world, with promising annual growths for UA products, if the company can improve on its market size in Greater China, it will help to make up for stagnation or loses that it may experience in America as projected earlier this year.
But failure to secure the China market will definitely, be a serious problem for a company that is predicting stagnation for the remaining part of the year.
For long time planning, China is strategic to the success of UA; therefore, reducing manufacturing presence in China may not help its expansion in the most populous nation in the world. Shipping from neighboring countries to China may not help either if we consider duties and other tariffs that imported goods will attract when entering China.
Conclusion
It’s only a matter of time before we see how the American market will react to new tariffs and patronage of UA products, but UA must secure the competitive advantage it enjoying in China. Reducing the production setup in China may not be good enough for the company that is struggling at home.
The truth is, it will take time to replace production networks that took decades to set up in China with new production systems in other countries, UA may need to consider exploring more avenues to market its products in China instead of reducing production in the country, since North American market is not promising at the moment.
