Under Armour's Dark-Horse Run Is Over. Was It Really Just Because It Isn't "Fashionable"?

"Under Armour is an extraordinary success story. The stock has risen almost 2,000% since it went public a decade ago, and risen steadily. But when your core apparel business is what you do every quarter, why try to shoot for the moon?"

Twenty-six straight quarters of sales growth above 20% earned Under Armour the title of the next Nike. It was the dark horse of the sporting-goods business.

Its biggest difference from Nike may be this: 70% of Under Armour's revenue comes from apparel, not shoes. With Nike it is the other way around.

When this "brand personal trainers wear" first came to China, it reportedly never went on discount, and for a while everyone at the gym had a piece of it.

More people know Under Armour because of the NBA player Stephen Curry. From 2015 on, his otherworldly play on the court sent people into Under Armour stores to try on basketball shoes. Ni Songnan and his classmates were among them: "We watched the NBA, bought their gear, tried on the Curry 2."

According to the sporting-goods retail tracker SsiDat, Curry's signature shoes sold $160 million in 2015, more than any other NBA player's, and drove 57% annual growth in Under Armour's footwear business.

But that wave of enthusiasm turned out to be less dependable than it looked. Last summer Curry lost the NBA Finals humiliatingly, then missed the Rio Olympics with an injury, leaving the U.S. basketball roster a Nike dream team. On the eve of America's November shopping season, Dick Johnson, head of Foot Locker, the country's largest sporting-goods retailer, said the Curry 3 was not selling as well as the two shoes before it.

On January 31 this year, Under Armour reported earnings that disappointed investors: fourth-quarter growth of 11.7% year over year, the lowest in eight years. The chief financial officer left, and the stock fell more than 25%.

People began to doubt Under Armour's growth plan. Shareholders filed a class-action suit accusing the company of "misleading statements" about its revenue and profit margins.

Starting two years ago, founder, chairman and chief executive Kevin Plank repeatedly issued non-voting shares, copying Silicon Valley tech companies to keep absolute control in his own hands. Plank now holds 15% of Under Armour's economic interest and 65% of its voting power.

The press describes Plank as a head coach, "as stern as a soldier," with "piercing eyes." The classic example of this former college football player's boldness: he insisted on spending $1 billion to invest in three mobile fitness apps, then personally talked round the employees who objected. At the latest investor meeting, Plank conceded one point: "The products we sell out there need to become more fashionable."

Online, one grey colorway of the Curry 3 was widely nicknamed the "grandma shoe," and spawned all kinds of mocking memes. In a sponsored article the brand ran on the streetwear site Highsnobiety (“Fashion Statement: How Under Armour's Curry 3 Brings Court Dominance to the Sneakerhead World”), the hard sell from sneaker influencer Qias Omar drew no warmth: three of the five comments beneath it threw cold water. "They're just an ugly version of the Air Force." A user with the handle "Discounted Yeezys" wrote: "I hope Qias takes fewer ads like this. He tries hard everywhere except the gym."

After the earnings report, most of the criticism was indeed aimed at Under Armour's weakness in athleisure.

The trend of wearing sportswear on the street has been discussed for at least three years and peaked in 2015; someone once called the annual New York City Marathon "the world's largest legging show." More than one report says athleisure, the category driving growth for the whole apparel industry, will keep spreading through 2017.

Meanwhile Puma, which embraced fashion collaborations and entertainment celebrities, posted handsome numbers. The singer Rihanna, its ambassador and creative director since late 2014, was called "Puma's cash cow." People seemed more certain than ever that whether the clothes look good enough, and whether the shoes have the right streetwear collaboration, is what decides a sportswear brand's fate.

The hit product may be the biggest keyword in the sportswear market of the past two years. This industry once produced the Air Max and the Air Jordan; now it produces the Stan Smith, the NMD, the Yeezy and the Puma Suede Creepers designed by Rihanna.

These new hits become popular by a very different route, though. They tend to involve a celebrity, they catch fire on social networks, and they hold consumers' attention with a steady stream of new colorways and limited-edition collaborations pushed out one after another.

Hits have brought the sporting-goods giants sizeable traffic and revenue growth; people have new reasons to walk into an Adidas Originals or Puma store. Through all of it one thing has not changed: a hit usually carries the brand's most advanced sports technology, with a touch of retro so it tells a better story. More important, hits are shoes, not clothes — and shoes are exactly Under Armour's weak spot.

That weak spot overlaps with the brand's shortage of fashion sense: the athleisure wind first blew because fashion designers put sneakers on models under their coats.

According to the earnings Adidas has just released, its footwear business, which accounts for half the total, grew 21% in 2016, while apparel grew only 7%. That doubled the company's share of the U.S. sneaker market, to 10%, still well behind Nike's 45%; footwear is the bulk of Nike's business, 65% of total revenue.

You see, you cannot hold your ground in this trade without good shoes, least of all now, when sneakers are worn on every occasion.

Under Armour began making shoes 11 years ago. Its company history reads: "In 2006 we began to think about how to outfit the athlete from head to toe." At first it sold only cleats designed for baseball and football players. Not until 2008 did it release its first training shoe, promoted with an expensive Super Bowl ad; in 2009 its first running shoe arrived. By then Under Armour had been public for four years, and between the financial crisis and the slump around the 2008 Olympics, when the whole sporting-goods industry sat on high inventory, the stock had gone nowhere. Still, that quiet work gave the company some experience in shoes.

In 2011 Under Armour sponsored the Premier League club Tottenham Hotspur, whose star, Gareth Bale, was making his name in the Champions League. In 2013 it signed Stephen Curry, the player who got away from Nike, and Under Armour's basketball shoes finally came into view.

Riding Curry's overnight fame on the basketball court, Under Armour looked a lot like the Nike that signed Michael Jordan. But the wind in the sportswear market has changed. Even Nike, which holds the basketball-shoe market firmly, has lately seen sales of its on-court performance shoes fall. Beyond competition from Adidas and Under Armour, the fiercest and fastest-growing fight is in running and fitness, which fit modern life better than basketball does.

There is a strange fact about sneakers: whenever shoe technology enters a relatively stagnant phase, the market fills up with shoes flying the retro flag. It has been four years since Nike invented Flyknit, and Infinergy, the expanded-bead foam technology in Adidas's Boost soles, recently lost a lawsuit to Puma and will soon no longer belong to Adidas alone. At a moment like this, being fashionable may be the shallowest reason to persuade a consumer to replace a pair of running shoes. Retail tracking by the market research firm NPD Group found that as of October 2016 the entire classics category of sneakers had grown 29%.

The most extreme case is Puma's boom. "Puma was never regarded in the U.S. market as a performance sports brand, so when we entered a phase where performance product sells worse than fashion styles, they benefited enormously," NPD Group sports-industry analyst Matt Powell said of the retro wave. "What's interesting is how many styles these brands have in their cellars to bring back."

In other words, selling retro running shoes takes capital even without technology; at the very least it takes history. Which is why the Curry 3 met the awkwardness it did on a streetwear site: Under Armour has too few kinds of shoes, so the only thing it can put forward is Curry's signature model. And after ten years of making shoes, people are still happy to call Under Armour a company that sells quick-dry shirts. That says something.

Under Armour's technical edge in shoes cannot match its home ground, fabric technology, and ordinary consumers cannot perceive fabric technology the way they perceive an air cushion with a little transparent window or a Boost sole made of white beads. How well a piece of activewear breathes is a difference only people who actually sweat through a workout can feel.

The truth is that the share of people who really understand Under Armour is probably shrinking, while the number who barely know it keeps growing.

Last July, Under Armour announced a deal with the upscale American department-store chain Kohl's: its products would enter Kohl's 1,100 stores across the country and carry the newest line, Under Armour Sportswear, or UAS. The Belgian designer Tim Coppens serves as UAS's creative director; it is aimed at the high-end sportswear market, priced in the hundreds of dollars and as high as $1,500.

Looking at the runway photos, it is hard to connect these clothes to Under Armour, and consumers may have to get used to the gap they open up in the brand. Analysts at Susquehanna Financial LLLP, after visiting Under Armour's various retail channels, found that the styles the brand sells at Kohl's are nearly identical to the ones it sells at Dick's, a sporting-goods chain.

The interesting part: just as Under Armour was moving into department stores on the theory that it would reach new customers there, the brands already in department stores started trying to sell sportswear. The latest figures from Euromonitor International: amid a turbulent political and economic climate, global apparel sales grew 3.8% year over year in 2016, to $1.67 trillion, the market's slowest growth since the 2008 financial crisis. Against that, sportswear, which has held 7% growth for three straight years, was the biggest bright spot.

If you follow QDaily, you probably know that over the past two years Uniqlo, H&M, Victoria's Secret, Beyoncé's athleisure label Ivy Park — even Amazon — have all given shoppers reason to hesitate over a sports bra, a pair of leggings or a workout T-shirt. Never mind the small independent labels. Overheated competition has brought new customers and new choices, and it has weakened Under Armour's say in sportswear.

Last January we interviewed shoppers at random in Under Armour's Shanghai flagship store. Asked why she first bought the brand, 28-year-old Lü Hongye gave an answer that may speak for many: "Mainly I buy the clothes, because fewer people wear this logo than wear Nike."

That route to popularity inside niche fitness circles is not hard to copy, and the hot brand there now is Reebok. Reebok's partnerships with the CrossFit and Les Mills training systems — group formats that cost less than personal training and spread more easily — have pulled many serious fitness enthusiasts over. Mainland China's first CrossFit gym, MeWellness in Shanghai, and Slash in Beijing are both "Reebok-certified." In those gyms, Under Armour has become the next brand everyone is sick of seeing.

Violent competition has dropped Under Armour into the same cycle of price cutting Nike fell into not long ago. Nike's gross margin has fallen for two straight quarters, to 44.2%, and its remedy is not original either: dump the leftovers at the discount chain TJX. Brian Sozzi, a reporter at TheStreet, recently found TJX shelves packed with discounted Under Armour activewear.

Those unsold clothes have a lot to do with last year's bankruptcy of the American sporting-goods retailer Sports Authority, which had 463 stores in the United States, 140 of them closing. "UA had a really strong presence there, so [Sports Authority's] bankruptcy hit it hard," said NPD Group analyst Eva Qian. Under Armour is not the only company facing a crisis on the retail side, but Nike and Adidas became global companies long ago and began building their own stores early.

So as the Curry fever fades, the problems Under Armour is exposing cannot be summed up by a simple "not fashionable enough."

To put it precisely, the sporting-goods industry is now a competition across the entire supply chain, and it changes far faster than in the era when Nike built its dominance on the basketball court. Fashionable hit sneakers have taken most people's attention, and Under Armour has no real ability to manufacture hits, nor has it broken through on innovation in sportswear.

Under Armour's weakness in marketing was exposed too, in an unexpected way. On February 7, Plank gave a television interview to CNBC to clarify, amid all the gloom after the earnings report, that the company's "growth plan is still intact." Everyone's attention went instead to a few lines in which he praised Donald Trump.

The brand's three endorsers — Stephen Curry, the actor Dwayne Johnson and the ballet dancer Misty Copeland — all came out against him, and the farce quickly turned into a PR crisis, with people on Twitter shouting for a boycott of Under Armour the way they had boycotted Budweiser over its controversial Super Bowl ad. Plank's response was clumsy: he took out a full-page open letter in The Baltimore Sun, the paper in the city where the company is based, to explain that he supported only Trump's domestic jobs policies, and to restate what the brand stands for.

Plank had long been the company's own "in-house advertising expert." Not until 2015 did Under Armour sign its first real creative agency, Droga5. He once mocked himself for it: "I thought I was pretty smart about advertising, because the answer to everything was to buy a full-page newspaper ad."

At last year's Cannes Lions festival he said: “When you're building a company, you can't grow everything at the same time.” But when $3 billion of a company's market value has evaporated, it is time to think about priorities.

A question an analyst asked last February suits the ending here: "Under Armour is an extraordinary success story. The stock has risen almost 2,000% since it went public a decade ago, and risen steadily. But when your core apparel business is what you do every quarter, why try to shoot for the moon?"

Cover image: Under Armour