Under Armour's success and risk factors
This accounting report addresses the success and risk factors facing Under Armour in the financial period of 2016. Through examination of various online sources properly cited and referenced in APA, the writer established that the focus of the company at this time is to expand its international presence, diversify its product portfolio, and increase revenue generation. The company, therefore, adopted an aggressive risk approach with more focus on long-term growth at the expense of short-term profitability. The company takes advantage of its physical resources to establish regional hubs that will help it achieve its globalization goals. These hubs will help grow the e-commerce sector and increase revenues generated from the direct-to-customer segment. Based on these strategies, it is projected that the company will maintain its annual revenue growth of 27% for the next three financial periods. Assuming other factors remain constant, the company will manage to grow its profitability over these periods.
December 2, 2024
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Under Armour's Success and Risk Factors
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Under Armour's Success and Risk Factors
Under Armour's financial strategy in 2016 focused on increasing company revenues
through product diversification and international market penetration (Under Armour, 2016).
This requires heavy investment in marketing, distribution channels, and product innovation,
which might be at the cost of short-term profitability. On the other hand, strategic priorities
were increasing innovations, increasing sponsorships and endorsement deals, and expanding
direct-to-consumer channels such as the e-commerce platform, which is rapidly rising (Under
Armour, 2016). These strategies impact accounting procedures and business decisions in
multiple ways. For example, with the increased focus on global expansion, cost management
might shift from efficiency to scalability to meet the rising demand. Also, focusing on growth
can increase the financial risks if the costs increase at a faster rate than the revenues. The
general impact of a growth mindset on business success is that it will strengthen Under
Armour’s brand but may increase short-term risks such as profitability margin pressure.
However, the firm adopts an aggressive risk approach, often prioritizing long-term success
over short-term gains.
Under Armour can better leverage its physical facilities to increase its visibility and
expand direct-to-customer sales. As of 2016, the company was outsourcing the production
process to third parties in Asian countries, which increased inefficiencies and might lead to
delays. Accordingly, the brand can invest in local distribution hubs to reduce shipping times
by streamlining inventory management. This would result in increased efficiency and reduced
costs, hence higher margins and customer satisfaction. Furthermore, this would help enhance
the direct-to-customer (DTC) segment of the company. In 2016, the DTC segment accounted
for 31% of the revenues, and the company is working to increase this segment, which is its
fastest growing (Under Armour, 2016). According to Business Market Insights (2022), the
Asian market for apparel and sportswear was estimated to increase by a compounded annual
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growth rate (CAGR) of 10.25% between 2016 and 2028, creating a huge market potential for
Under Armour. The company should increase its physical stores in large cities like Tokyo to
increase visibility and expand its presence in Asian e-commerce platforms. Using the
physical facilities to increase the DTC segment would result in higher margins for the
company (Kestenbaum, 2020).
The company is currently facing a high risk of production disruption because it
outsources most of the production process to third parties. Dependence on external suppliers
and producers increases the risk of disruption caused by natural disasters, political conflicts,
labor strikes, and global pandemics. This would result in delayed production and loss of
potential sales opportunities. For example, Nike, a direct competitor of Under Armour,
experienced production disruptions in 2014 after workers in one of its contracted companies
in China engaged in a strike (AFP, 2014). Furthermore, such strikes often lead to an increase
in wages, hence an unprecedented increase in production costs. Therefore, moving forward,
the company needs to invest in in-house production to mitigate such risks.
Projections
In the past five years, Under Armour has maintained a CAGR of 27% for revenues
(Under Armour, 2016). It is therefore assumed that the company will maintain this growth in
the next three years, considering its aggressive international expansion, product innovation,
and diversification strategies. Ratio-based forecasting was then used for other items in the
consolidated income statement. For example, the cost of goods sold was 0.536% of revenues
across three periods, 0.377% for expenses, 0.00548% for interest expense, and 0.00057 for
other expenses, as shown in the appendix.
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References
AFP. (2014, April 16). Thousands of workers strike at China shoe factory. Capital Business.
https://www.capitalfm.co.ke/business/2014/04/thousands-of-workers-strike-at-china-s
hoe-factory/#google_vignette
Business Market Insights. (2022). Asia Pacific Athleisure Market to 2028 - By Size, Share,
Growth by End User and Forecast| Business Market Insights.
Www.businessmarketinsights.com.
https://www.businessmarketinsights.com/reports/asia-pacific-athleisure-market
Kestenbaum, R. (2020). How Direct-To-Consumer Companies Succeed—And Why Many
Fail. Forbes.
https://www.forbes.com/sites/richardkestenbaum/2020/09/21/how-direct-to-consumer
-companies-succeed-and-why-many-fail/
Under Armour. (2016). 2016 Annual Reports. Underarmour.com.
https://underarmourinc.gcs-web.com/static-files/9801ef64-9915-4b77-af34-03e26689
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Appendix 1: Projected Income Statement
In Thousands $
2016
2017
2018
2019
Revenue
4825335
6128175
7782783
9884134
Cost of Revenue
2584724
3282599
4168901
5294505
Gross Operating Profit
2240611
2845576
3613881
4589629
Selling, General, and Administrative Expenses
1823140
2315388
2940543
3734489
income from operations
417471
530188.2
673339
855140.5
interest expense Net
-26434
-33571.2
-42635.4
-54147
other expense net
-2755
-3498.85
-4443.54
-5643.3
income before income tax (EBIT)
388282
493118.1
626260
795350.2
December 2, 2024
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Academic level:
Undergraduate 3-4
Type of paper:
Report
Discipline:
Accounting
Citation:
APA
Pages:
3 (760 words)
Spacing:
Double
* The sample essays are for browsing purposes only and are not to be submitted as original work to avoid issues with plagiarism.
