Under Armour strategic report free essay sample

These statements relate to expectations, beliefs, anticipated events and future trends, and are not necessarily based on historical facts, but are conditions and issues that are current to the market environment, are reasonable, but constitute only current views about future events. Economic Conditions and Trends There are several conditions that will be useful to monitor over the next decade for Under Armour, including: 1. Underperforming economies- A declining retail consumer market and an overall struggling economy means potential difficulties for UA which offers closely related, non-essential products. Several factors include general economic conditions, available consumer credit, and consumer confidence . Since UA has very limited experience working in a economic downturn, they are unable to effectively predict the full impact of a downturn in the economy with regards to sales and profits. â€Å"Consumer purchases of discretionary items tend to decline during recessionary periods when disposable income is lower or during other periods of economic instability or uncertainty† The financial conditions of the retail customers, are a concern, as well. UA currently extends credit to all retail customers, based on their financial condition, usually without requiring collateral. Economic uncertainties increase the risk of this practice, as a â€Å"slowing economy in our key markets or a continued decline in consumer purchases of sporting goods generally could have an adverse affect on the financial health of UA retail customers, which in turn, would have an adverse affect on UA sales, and their ability to collect on receivables† (UA, Inc-10k annual 2012) 2. Supply chain issuesSome suppliers used by UA are commodities, such as petroleum based materials and therefore are subject to potential price fluctuations, particularly when petroleum supplies are under duress. Other supplier economic related issues include: Specialty fabrics – Used in UA products are technically advanced textile products developed by third party suppliers and may be available, at least for the short term from a very limited number of sources. In 2011, only seven suppliers provided 45% of all UA products . Any disruption of the supply chain, due to unseen market forces could create product shortages, particularly if UA is unable to locate alternative suppliers. If additional supply sources can be found, UA may experience interruptions in customer order fulfillment, until the new suppliers have reached quality control standards and are properly trained. Labor Disruptions- Labor disputes at various ports or at the supply source can create significant risks such as work slowdowns, lockouts, strikes or other disruptions during â€Å"peak† importing or manufacturing seasons and could adversely affect UA business, â€Å"potentially resulting in cancelled orders by customers† (UA, 10K, 2012) Capital requirements- Growing and operating the UA business plan, will require significant cash outlays and capital expenditures for both product , capital equipment and property. Changes in leverage ratios, and interest coverage as defined in the UA credit agreement with their financiers, due to unforeseen economic influencers, could have a â€Å"material adverse effect on the UA business, operations and cash flow. If additional capital is needed, UA may have difficulty raising needed cash on terms that would be acceptable to the organization, depending on cash availability or restrictions due to economic uncertainties. If financing for whatever reason, would become insufficient or unavailable, â€Å"UA would be required to modify its growth and operating plans based on the availability of these funds†. Distribution problems- UA has a limited number of facilities, all which utilize computer controlled and automated equipment, making operations complicated. Risks include: security and computer viruses, power interruptions or other system failures, floods, fires or other natural disasters. If UA were to encounter such problems with their distribution facilities, â€Å"the ability to meet customer expectations, manage inventory and complete sales goals, would be materially adversely affected† (UA, 10K report, 2012) 3. Tax Laws – Because UA is subject to income taxes in the U. S, as well as numerous foreign jurisdictions, the effective tax rate could be adversely affected in the future, particularly as hard hit national governments seek to recoup lost tax revenues due to economic downturn. Several factors are important to consider, including â€Å"changes in the mix of earnings in countries with differing tax rates, changes in the valuation of deferred tax assets and liabilities, and changes in tax laws, each of which could adversely affect profitability. Exchange rates will have a major impact on Under Armour from both the Globalization sales efforts and finished goods supply chain based on foreign soil. Exchange rates affect â€Å" export opportunities, the profitability of international trade and investment deals, and the price competitiveness of foreign imports† (Hill, 2007, p. 345) All of these factors have a major impact on global business, therefore it is essential that UA understands this foreign exchange risk. The majority of economic theories of exchange rate movements for any country, point to three factors: 1) price inflation 2) local interest rates, and 3) market psychology. â€Å"The law of one price states that in competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency. † (Hill, 2007, p. 345) Cultural and Social Issues The UA target market up to this point has been the male sports â€Å"identity† population between the ages of 15-31, mostly consisting of the Gen Y demographic segment. Because the Gen Y segment is the second largest segment next to the boomers (85 million strong), future growth looks optimistic, particularly because UA is also doing well with the Gen Z group, who will be even more likely to carry brand loyalty into their 20’s and beyond. UA has recently been active in reaching out to women and girl athletes in the same demographic age sets. Even though the Gen Y spending only makes up 4% of a typical household spending, this buying group tends to be more tech savvy, and tend to spend on highly â€Å"image† related products. (Athletes buy athletic gear and clothing, etc) Currently UA has a positive image here in the U. S. , due to a strong brand identification of the target market to UA products countrywide. A high level of belief in the technology advantages of UA products is a majority factor in the current success of the brand image. UA believes that â€Å"continued growth in industry wide sales of performance apparel, footwear and accessories will be largely dependent on consumers continuing to transition from traditional alternatives to performance products† This shift in belief systems, could shift at some point in time, as history has shown that the American public can move from trend to trend in the blink of an eye , due to massive advertising monies dedicated to the industry by competitors and the media. The U. S. public is known worldwide for its fascination with sports and athletics, and the lifestyles associated with these pastimes. A perfect market such as sporting goods apparel, may attract another â€Å"disruptor† much like UA, in some not too distant future, with something newer, more attractive, technologically advanced, and with a similarly great startup story. In addition, because â€Å"performance products are often more expensive than traditional alternatives, consumers who are now convinced these products provide a better alternative may still not be convinced they are worth the extra cost. Social/Economic/Cultural differences will have a great bearing in these types of buying decisions as those who engage in sports activities in certain areas of the country may not identify so closely to the â€Å" sports hero† or â€Å"team† identity culture that is evident in UA marketing efforts. (UA, 10K report, 2012) Another issue to consider is that UA offers products that are closely related and non-essential is therefore subject to the fashion preferences of the public. If Under Armour were to enter new markets such as casual clothing, they might lose some of the appeal that differentiates them from the competition. Social responsibility is a key factor to continued U. S. success for UA, especially in light of the damage sustained by Nike when it was revealed that some of their overseas plants had been practicing forced labor, breaking child labor laws, and determined to be unsafe working environments. If Under Armour were to practice any type of unethical behavior , whether it be child labor, or not compensating employees adequately for overtime, their reputation would be tarnished, as well. This type of problem would be more difficult  for a company the size of UA to overcome, than it was for Giant Nike, who had the stamina and deep pocket books to take on the media firestorm with a positive media message of their own, and to correct the problems quickly. â€Å"Under Armour has several policies put in place that address issues such as forced labor , child labor, harassment, discrimination, health and safety, and worker’s environment, compensation , benefits, and rights† Ensuring ethical rights should be a concern of Under Armour’s throughout the nation, as well as internationally. It will be important, as well, that UA exhibits social responsibility through supporting and sponsoring several charity organizations. Currently UA has been involved with the â€Å"Conservation Fund† and â€Å"Power in Pink† both notably worthwhile U. S. charities. Lastly , one of the key social/cultural advantage that has most evident in the rapid rise of UA in the sports apparel market, has been the development of extensive sponsorships throughout the U. S. sports world, including supplying 30 of the 32 NFL teams, and is the official supplier for the MLB, the MLS, the NHL, USA baseball and the US ski team. â€Å"A key element has been to create a link in the consumer market between our products and professional and collegiate athletes† This strategy has run parallel to the rapid rise of popularity in these specific sports arena and their participating athletes, both here and internationally. â€Å"However, as competition in the performance apparel and footwear industry has increased , the costs associated with athlete sponsorships and official supplier licensing agreements have increase, including the costs associated with obtaining and retaining these sponsorships and agreements† Particularly in the U.S. , the added spotlight on â€Å"super athletes† has driven up the demand for heavy cash outlays to secure the â€Å"association† of such athletes and teams. This cultural phenomenon, could be a problem for UA in the future, particularly if they are unable to maintain the current association with professional and collegiate athletes, teams and leagues, or to do so at a reasonable cost. This could potentially lead to losing the â€Å"on-field authenticity associated with UA products, and could ultimately be adversely affected in brand image, net revenues, expenses and profitability† (UA, 10K report, 2012) Global expansion will continue to be an emphasis over the next few years, as this is the most fertile new business opportunity for UA. This expansion will require the need for UA to adjust its message and products for the Europeans, for example, as UA’s traditional football and baseball centric marketing will not have the same affect on a culture with different sports preferences. UA has already found some traction here already, creating sponsorships with the Welsh Rugby Union, German, England, and Greece soccer Teams, and the Toronto Maple Leafs in Canada. Trending sports like mixed martial arts, are also the subject of attention , as UA has recently endorsed a premier UK martial arts expert, Cloe Bruce. The rising popularity of women’s sports, will require additional product innovation and advertising, as well. (www. forbes. com/sites/freddreier/2012) Geo-Political and Legal issues By year end 2011, UA was manufacturing products in 16 countries, using 23 primary manufacturers. Of these manufacturers, only 7 produced over 45% of UA products in Cambodia, China, Honduras, Indonesia, Jordan, Mexico, Nicaragua, the Philippines, Vietnam and San Salvador. â€Å"During 2011, approximately 60% of UA products were made in Asia, 22% in Central and South America and 8% in Mexico. † A major concern for UA going forward with regards to the manufacturing side of the business, are the risks associated with doing business abroad where many political and geographical challenges, lie outside UA’s ability to control. A few of these concerns are : Political and labor unrest, terrorism and economic instability which could result in the disruption of trade from foreign countries in which UA products are produced. Currency exchange fluctuations The introduction and implementation of new laws and regulations, including those related to labor conditions, quality and safety standards, imports, duties, taxes and other charges on imports, trade restrictions and restrictions on the transfer of funds. Also to considered are rules and regulations regarding climate change. Reduced protection for intellectual property rights in some countries Changes in local economic conditions, due to political policies, that impact credit, cash flow and purchasing by our manufactures in these locales. (UA, 10K report, 2012) Global expansion of sales will be impacted, as well by these same issues, and will need to be considered during priority selection of target foreign markets. For example, UA currently sells indirectly to the consumer through distributors to much of Central and South America and Mexico. Many South American countries like Argentina, present too many risks associated with direct expansion, such as a recent recovery from a complete economic collapse, resulting in a high level of uncertainty and instability in this country. That coupled with a known , questionable legislative system, poses yet greater risk for a targeted entry into such a market. Mexico has some of the same inherent risks as with any foreign market, but the chance for success is greater because Mexico is an active participant in the North American Free Trade Agreement (NAFTA) and is governed to a degree by it statutes. In the U. S.  and across the globe, UA will also be subject to trade , and other regulations that could pose a risk to active investigations by government regulators if there is a failure to comply. â€Å"The labeling, distribution, importation, marketing and sale of UA products are subject to extensive regulation by various federal agencies, including the Federal Trade Commission, Consumer Product Safety Commission and state attorney generals here in the U. S. Elsewhere, UA faces similar trade oversight by other federal, state, provincial, local and international regulatory authorities in locations that their products are sold. The risk of noncompliance could result in significant penalties or claims which could harm UA operational functions, and /or the ability to conduct business. The adoption of new regulations or changes in the interpretation of existing regulations may also result in compliance costs, and may result in the discontinuation of product in a worst case scenario. Adding Global expansion to this matter, and the legal risk of doing business in some countries may become cost prohibitive. Two other important factors must be considered in this discussion on Legal issues that are significant to UA: The fabrics and the manufacturing technology of UA products are not easily patented, in fact, UA currently owns fabric or process patents on any of its products. â€Å"As a result , our current and future competitors are able to manufacture and sell products with performance characteristics and fabrications similar to our products. This is a big issue, and will be discussed in the later problems and strategies sections of this report. The success of UA depends largely on the brand image of its products. For UA , the registered and common law trademarks have â€Å"significant value† and are important identifiers and differentiators from it’s competition. As UA continues to expand product lines, they will be subject to claims from competitors who believe that UA is stepping on intellectual property rights of others, and fully expect that similar encroachments are to be expected against UA intellectual property from product expansions from competitors, as well. Environmental Issues The most important environmental issue affecting net sales revenues for UA products, is the weather. While quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including timing of introductions and advertising, and changes in the product mix, most of these issues are controllable by the company. Weather, of course is not a controllable factor, and has, shown to have an adverse effect on quarterly results of operations and sales for UA. For example, the warmer than normal weather conditions throughout the fall and winter had an effect on the COLDGEAR line , leaving UA with heavy inventories into the spring of 2012. As most of the product was shipped prior to the unseasonable weather hitting, Much of the real impact will be felt in the fall 2012 sell in when many distributors and wholesalers will be stuck with last years’s inventory. Europe, which suffered from more summer weather issues has been beset by weaker than inflation sales increases (+2. 7%) suggesting that unit sales for UA, (as well as other similar sporting apparel companies) in that region actually fell. Among the list of sustainable business practices almost universally accepted by most CEO’s is the environmental factors that socially responsible companies are addressing, and more importantly reporting, such as resource consumption, emissions, and land/water conservation. Under Armour’s website contains information which addresses many of the requirements for sustainable business practices including global labor standards, and a code of conduct for suppliers, and a code of Business Ethics. Attention to this significant modern responsibility for successful companies is not without reward: Investment in socially responsible companies has grown from an estimated 12 billion in 1995 to over $220 billion in 2011. (Business Week online 2011) SPORTING GOODS APPAREL AND FOOTWEAR INDUSTRY Overview The Global Athletic Apparel and Footwear Industry is a dynamic and growing industry driven by a trend toward healthier, more active lifestyles, with several participating apparel companies joining with fashion designers to produce new clothing styles and to widen their product lines. The world sports apparel industry reached 120. 1 billion dollars in sales for 2011, and is forecasted to grow to 126. 30 billion $ Sales by the year 2015. Sales will continue to be driven by a trend toward less formal dress in the workplace and demand from specific demographics such as teenagers and baby boomers. These blurred lines of differentiation between sports apparel and garments used for casual, business, and everyday street wear continue to define an ever-changing landscape in the sports and fitness clothing market. Minor differences between sports apparel fitness, clothing and casual, active wear are leading to an interesting change in the target audiences. Changes in lifestyles and attitude towards fitness outerwear, are determining fashion trends with consumers, particularly with women, who are exhibiting a demand for more fashionable workout wear. Trends include, a â€Å"growing emphasis on versatility, convenience, fashion, compfort, style and performance is creating a strong demand for sports and fitness clothing which offers boh functional performance and style appeal. † (www. strategyr. com/sportsandfitness. An aging but active population in the U. S, Japan, European and emerging markets such as Asia and Latin America are excellent growth markets for sports apparel manufacturers. As women take up newer sports, they are becoming a highly lucrative target audience, as well. On the retail front sporting goods stores compete with fashion stores, while mass merchandisers compete with department stores and sporting goods chains for a piece of the market pie. Consumers are demonstrating a wide variety of preferences, classy tastes, and an eye for performance, flexibility and function. Increasingly, this target market is willing pay more for these product characteristic that might help them to gain a competitive advantage in their sports pursuit. New fabric characteristics such as temperature regulation, friction reduction, moisture advantage, stretch, lightness, and wind/water resistance are in popular demand. A strong trend towards â€Å"brand strengthening† is evidenced by downward integration of the sports apparel manufacturers into the retail distribution arena like â€Å"shop within a shop† in the chain stores, and single brand stores.