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Under Armour steps into footwear field

Under Armour is set to challenge Nike, Adidas, Reebok, and New Balance in the heavily competitive athletic footwear category.
Image: Under Armour
Sports apparel maker Under Armour is set to do battle with Nike, Adidas in the footwear category.Business Week
/ Source: Business Week

Walk into the Dick's Sporting Goods in Brighton, Mich., and you come to an Under Armour display of shirts, shorts, hoodies, underwear, and socks. The display is about the same size as Nike's space, despite Nike being 10 times the size of the Baltimore upstart. That's because when it comes to reaching 10- to 24-year-olds, Under Armour "performance" apparel — which wicks perspiration off the skin instead of absorbing it — draws more dollars at Dick's than Nike does. Nearby, though, an entire wall is devoted to footwear, the turf on which Nike and Adidas dominate. Under Armour is nonexistent beyond baseball and football cleats, yet it is on that very formidable wall that Under Armour CEO Kevin Plank aims to grow the company.

On Feb. 3, Under Armour will run its first-ever Super Bowl ad for a cross-trainer sneaker it figures will start to challenge Nike, Adidas, Reebok, and New Balance in the heavily competitive athletic footwear category. The 60-second ad, for which the company is spending more than $5 million, features a computer-generated version of company spokesman "Big E" (former NFL player Eric Ogbogu). "This is a huge turning point for the Under Armour brand, and this is exactly the right venue to launch our first sneaker," says Steve Battista, vice-president of marketing.

The ad plays to Under Armour's near cultlike following. It is a combination of live-action film and CGI. The first part of the ad features people working out in UA apparel and wearing one of the three versions of the new Prototype cross-trainer shoes. The settings, though, are cinematically shot warehouses and alleys, giving the ad a distinct video-game look even before the CGI effects come into play. Other athletes in the ad include the New York Giants' Brandon Jacobs, the San Francisco 49ers' Vernon Davis, and the Chicago Cubs' Alfonso Soriano.

Is Under Armour mad for challenging Nike and Adidas in sneakers? After all, Nike in particular can outspend UA 10 to 1 in advertising, not to mention its capacity to cut prices to push volume.

Its track record in apparel would suggest, however, that UA has an opening in the market. "We believe the company's growth prospects in the footwear product category are very strong," says John Shanley, analyst at Susquehanna Financial Group, which recently initiated coverage of the company with a "neutral" rating on the stock. Shanley says Under Armour is entering a treacherous category fiercely defended by the big players, which is a cloud that hangs over the company this year as he waits to see how the two bigger rivals respond. Still, Shanley points out, "Under Armour is one of the fastest growing and best differentiated brands in the athletic marketplace today."

Under Armour's Super Bowl debut comes just before it reports earnings and after a period of volatility for its shares. Earlier this month, the stock tumbled after the company said its first-half earnings for 2008 would come in below expectations, or about a nickel a share instead of the 40¢ analysts were expecting. That's because of the costs of launching the new sneakers. The stock tumbled to a 52-week low of $25 on Jan. 22, from more than $45. (In August, the stock traded above $73.) The shares have rebounded more than 30% since, and closed Jan. 29 at $36. The rebound comes, in part, on anticipation that UA's sneakers will score with its public.

The strength of the brand can be seen in the bugged-out eyes of Adam Peyton, a 19-year-old college student in Ann Arbor, Mich., who wears nothing but Under Armour shirts and shorts when he works out at the YMCA. While shooting baskets, he spied a pair of premarket Prototypes and demanded to try them on. "I heard about these things…UA is my brand," Peyton says. "Nikes are good, but everybody has Nike."

If Under Armour's track record with performance apparel is any indication of the strength of its brand, Nike and Adidas are right to keep an eye on the upstart, which is expected to post about $605 million in sales last year, up from $431 million in 2006. UA has 43% of the total U.S. performance apparel business sold through sporting goods stores, versus 32% for Nike and 5.1% for Adidas. "Under Armour is identified with performance the way Starbucks is identified with better coffee, and that is a huge advantage in entering new categories," says independent marketing consultant Dennis Keene.

Under Armour's Plank is nearly obsessed with maintaining that differentiation from Nike, and refers to "authenticity" as his guiding principal when it comes to growing or communicating the brand. Under Armour, for example, identifies itself with team sports, rather than individual sports and fashion. Susquehanna's Shanley says that 90% of Nike and Adidas shoes never see a court or playing field. "Everything we do is centered on performance … we aren't ever going to develop products to fill up a sales table," says Plank. Specifically, Plank says, UA will never produce cotton shirts or pants.

That means Under Armour's brand has to carry the load. That's because none of the fabrics UA uses in its products are patented or special. Nike, Adidas, Russell, and Private Label all compete against UA with the same kinds of shirts and shorts that do not absorb perspiration.

The Prototypes, which will carry prices ranging from $89 to $100, are designed to ignite the stagnant segment of cross-trainer sneakers, as well as secure three places on the sneaker walls of sporting goods stores from the start. The shoes come in three versions: Proto Power, Proto Speed, and Proto Evade. All three have what Plank calls "directional cushioning," padding where the athlete's foot needs it most. The Speed shoe is designed for straight-ahead speed, or someone who runs a lot. The Evade is cushioned especially for lateral movement, perhaps for someone who works out aerobically or with weights. The Power is a high-top sneaker that could be suitable for cross-training, as well as basketball, but UA won't sell it for hoops. A basketball shoe, though, is sure to come next year.

In Year One, says Plank, the shoes' availability will be limited. To help build anticipation among brand fans, stores will install a countdown clock marking the days until May when the shoes arrive. Under Armour is also adding to its distribution this year, says Battista, with 250,000 square feet of additional selling space in stores.

Plank knows that he is entering the gladiator's pit. But UA has already stung Adidas in the small-cleated shoes market by snatching 11.3%—the same share as the German sports company—of the baseball shoe market in its first year. It took 20% of the football shoe market in its first year. The CEO, who started conceiving the first UA shirts while a student at the University of Maryland in the mid-1990s, says the Prototype line is a big step in transforming the company.

Today, for example, women's apparel represents only about 23% of sales. He expects that market to eventually make up more than half the company's sales. And he expects footwear to eventually eclipse apparel sales. In the future, he also sees sports equipment like balls and exercise equipment as possibilities. Among the opportunities he has refused so far is an Under Armour-branded sports drink.

Says Plank, "We have a brand story we are telling, and we have to take it chapter by chapter."