The 3 Biggest Risks to Under Armour Inc's Business
Last month, I wrote about how I believed a 20% drop from recent highs presented a buying opportunity in Under Armour shares. With 24 consecutive quarters of 20%-plus revenue growth, a founder-CEO at the helm, and an aggressive move into Connected Fitness, its digital technology suite of health trackers and mobile applications, I believe Under Armour is in a position to provide shareholders plenty to cheer about over the long-term.
However, no investment is without risk, and Under Armour is no exception. Let's take a look at some of the biggest risks to its business.
Departure of Kevin Plank
Much of Under Armour's recent stock decline can be attributed to the departure of two key executives. The chief merchandising officer position is temporarily being backfilled by the current chief marketing officer, Kip Fulks, while the chief digital officer role will be taken over by MyFitnessPal co-founder Michael Lee. There will likely be some bumps in the road as the leadership team works through the transition. However, in the long run, the moves are unlikely to have a large impact on the company as both positions can be filled by experienced and competent leaders. However, if founder and CEO Kevin Plank were to leave the company, that bump in the road would be more like a mountain.
Under Armour founder and CEO Kevin Plank. Image source: Under Armour
In 1995, CEO Kevin Plank created a T-shirt that wicked away moisture for his former football team at the University of Maryland. After perfecting the design, he began selling those T-shirts out of the back of his trunk, and 20 years later, he has led Under Armour in developing a $17 billion business.
A recent study by Harvard Business Review found that returns to shareholders of companies that are currently led by their founders are three times higher than those of other companies. The top performers have a founder's mentality, which management consulting firm Bain & Company defines as "behaviors typically embodied by a bold, ambitious founder -- to restore the speed, focus, and connection to customers."
Since its IPO in 2005, shares in Under Armour are up over 1,120%. To safeguard Plank's ability to maintain a founder-led culture, the company recently split its stock in a way that will ensure majority voting power remains with its dynamic CEO. If for some reason Kevin Plank were no longer leading the company he founded, investors would be wise to consider parking their investing dollars elsewhere.
Connected Fitness flops
Since 2013, Under Armour has spent nearly $1 billion acquiring three fitness and activity apps. The purchases of MapMyFitness, MyFitnessPal, and Endomondo are a part of Under Armour's strategy of connecting with customers and increasing awareness and sales through its wholesale and direct-to-consumer channels.
Under Armour's HealthBox Connected Fitness app. Image source: Under Armour
Under Armour intends to leverage the data from its 160 million registered Connected Fitness users to boost engagement and monetize these apps. The company is off to a good start in terms of growing its digital business. In its most recent quarter, revenue in its Connected Fitness category grew 119% to $18.5 million. Still, while Connected Fitness makes up less than 2% of the overall business, its absence would have resulted in an increase of 47% in overall operating income. In the first quarter of 2016, Connected Fitness' contribution to operating income was a loss of $16.5 million.
Supply chain doesn't improve
The article The 3 Biggest Risks to Under Armour Inc's Business originally appeared on Fool.com.
Palbir Nijjar owns shares of Nike and Under Armour (A Shares). The Motley Fool owns shares of and recommends Nike and Under Armour (A Shares). The Motley Fool owns shares of Under Armour (C Shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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