Harvard Case - Under Armour Under Pressure: Ratio Analysis
"Under Armour Under Pressure: Ratio Analysis" Harvard business case study is written by chuan Frank Li, Michael Saunders. It deals with the challenges in the field of Finance. The case study is 13 page(s) long and it was first published on : Oct 17, 2018
At Fern Fort University, we recommend that Under Armour implement a comprehensive strategic plan to address its declining profitability and market share, focusing on:
- Re-energizing its core apparel business: This involves streamlining operations, improving product quality, and strengthening brand image.
- Investing in technology and innovation: This includes leveraging data analytics to personalize customer experiences and develop innovative products.
- Optimizing its capital structure: This requires carefully managing debt levels, exploring potential equity financing, and considering strategic acquisitions to enhance growth.
2. Background
Under Armour, a leading athletic apparel and footwear company, faced significant challenges in the early 2010s. Despite strong growth in the early years, the company experienced declining sales, profitability, and market share. This case study examines Under Armour's financial performance using ratio analysis to identify key areas for improvement.
The main protagonists of the case study are:
- Kevin Plank: Founder and CEO of Under Armour, responsible for the company's strategic direction.
- The Board of Directors: Responsible for overseeing the company's overall performance and making key decisions.
- Management Team: Responsible for implementing the company's strategies and achieving financial goals.
3. Analysis of the Case Study
The case study uses ratio analysis to assess Under Armour's financial health across various dimensions:
Profitability Ratios:
- Gross Profit Margin: Declining gross profit margin indicates increasing cost of goods sold, potentially due to competition or inefficient manufacturing processes.
- Operating Profit Margin: Lower operating profit margin suggests challenges in managing operating expenses, potentially due to increased marketing costs or inefficient operations.
- Net Profit Margin: Declining net profit margin highlights the company's struggle to maintain profitability despite revenue growth.
Liquidity Ratios:
- Current Ratio: While Under Armour maintains a healthy current ratio, it highlights the need to manage working capital efficiently and avoid excessive inventory buildup.
- Quick Ratio: A slightly lower quick ratio indicates potential challenges in meeting short-term obligations, prompting a need for better cash flow management.
Asset Management Ratios:
- Inventory Turnover: A declining inventory turnover ratio signals inefficient inventory management, potentially leading to higher storage costs and obsolescence.
- Days Sales Outstanding: Increasing days sales outstanding suggests issues in collecting receivables, impacting cash flow and profitability.
Market Value Ratios:
- Price-to-Earnings Ratio: A declining P/E ratio reflects investor concerns about the company's future prospects and potential for growth.
- Market-to-Book Ratio: A decreasing market-to-book ratio indicates a declining market valuation compared to the company's book value, highlighting investor skepticism.
Financial Statement Analysis:
- Balance Sheet: Analysis reveals a growing reliance on debt financing, raising concerns about financial leverage and potential risks associated with high debt levels.
- Income Statement: Declining profitability, despite revenue growth, points to the need for cost optimization and operational efficiency improvements.
- Cash Flow Statement: A decrease in operating cash flow suggests challenges in managing working capital and generating cash from core operations.
4. Recommendations
Re-energizing the Core Apparel Business:
- Streamline Operations: Implement lean manufacturing processes to reduce costs and improve efficiency.
- Improve Product Quality: Focus on developing high-quality, durable products that meet customer expectations.
- Strengthen Brand Image: Re-establish Under Armour's brand identity through targeted marketing campaigns and partnerships.
Investing in Technology and Innovation:
- Leverage Data Analytics: Utilize data to personalize customer experiences, optimize product development, and improve marketing effectiveness.
- Develop Innovative Products: Invest in research and development to create innovative products that differentiate Under Armour in the market.
Optimizing Capital Structure:
- Manage Debt Levels: Carefully manage debt levels to minimize financial risk and maintain a healthy debt-to-equity ratio.
- Explore Equity Financing: Consider issuing new equity to raise capital for growth initiatives and reduce debt burden.
- Strategic Acquisitions: Evaluate potential acquisitions to expand into new markets or acquire complementary businesses.
5. Basis of Recommendations
These recommendations are based on a comprehensive analysis of Under Armour's financial performance, market position, and competitive landscape. They consider:
- Core Competencies: Building on Under Armour's strengths in athletic apparel and footwear, the recommendations focus on enhancing product quality, innovation, and brand image.
- External Customers: The recommendations aim to improve customer satisfaction by offering high-quality products, personalized experiences, and innovative solutions.
- Internal Clients: The recommendations emphasize operational efficiency, cost optimization, and employee engagement to improve internal processes and enhance employee satisfaction.
- Competitors: The recommendations consider the competitive landscape and aim to differentiate Under Armour through innovation, product quality, and brand differentiation.
- Attractiveness: The recommendations are expected to improve profitability, increase market share, and enhance shareholder value.
6. Conclusion
Under Armour faces significant challenges, but by implementing a comprehensive strategic plan focused on revitalizing its core business, investing in technology and innovation, and optimizing its capital structure, the company can regain its competitive edge and achieve sustainable growth.
7. Discussion
Alternatives:
- Divesting Non-Core Businesses: Under Armour could consider divesting non-core businesses to focus resources on its core apparel and footwear operations.
- Merging with a Competitor: Merging with a competitor could provide access to new markets, resources, and technologies, but it would require careful consideration of potential conflicts and integration challenges.
Risks and Key Assumptions:
- Execution Risk: Implementing the recommendations requires effective execution and commitment from the management team.
- Market Volatility: The athletic apparel market is subject to fluctuations in consumer demand and economic conditions.
- Competitive Landscape: The competitive landscape is dynamic, and competitors may introduce new products or technologies that could disrupt Under Armour's market position.
8. Next Steps
- Develop a Detailed Implementation Plan: Define specific actions, timelines, and resource allocation for each recommendation.
- Communicate the Strategy: Clearly communicate the strategic plan to employees, investors, and stakeholders.
- Monitor Progress: Regularly track key performance indicators to assess the effectiveness of the implemented strategies and make adjustments as needed.
By taking decisive action and implementing these recommendations, Under Armour can overcome its current challenges and position itself for future success.
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Case Description
An analyst at Vaux Gibson Inc., a fund that managed a portfolio of North American equities, was tasked with reviewing the fund's holdings of Under Armour Inc. (Under Armour) and providing recommendations for the fund's prospective investment strategy with the company. Under Armour had experienced significant revenues and bottom-line growth over the past three years, but this growth slowed significantly in 2017 and the company reported a net loss, resulting in the significant depreciation of its stock price. The analyst wondered if it was time to exit the investment, providing investors with an above-market return, or if there was still room for Under Armour to recover and grow.
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