The Notes to the Financial Statements cover a variety of topics and for the purposes of this study are divided into three parts. First, the risk factors section details the ways that macroeconomic risks could adversely impact future results of operations. If there is a downturn in the economy, discretionary purchases such as sporting apparel will be affected and will reduce sales and profitability. The variables to consider are primarily macroeconomic in nature—consumer spending levels, the availability of consumer credit, levels of disposable income and whether the markets in which the products are sold are affected by these economic metrics.
Customer credit is extended on the basis of unsecured lines of credit. If order reductions or cancellation occur, cash flow is affected. During non-peak periods, retail customers may be more hesitant to order. If a major strategic relationship is affected, it negatively impacts the financial standing of the company. For example, in 2013, 22% of the company’s net revenues were generated from sales to only two customers. This is not guaranteed by contract to continue. As a result, default of these relationships would have a major financial impact in revenues.
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Secondly, another risk group to consider is pressure on margins. The apparel industry is cyclical in terms pricing pressure. There is intense competition and constant merger activity in the industry. With mergers come falling cost structures and therefore reduced price targets for products sold at retail. To keep current with competitor price structures the company may have to reduce prices, reducing the gross margins. Profitability drops as a result. A materially adverse scenario develops with too much consolidation in the industry. The industry has a limited number of competitors since it is specialized apparel. All fabrics used by the company’s manufacturers are subject to price fluctuations since the products are petroleum-based and cotton-based. Fluctuations in either of these commodities create lower margins. The cost of transportation is another factor subject to large swings, and certain manufacturers are subject to government cost controls.
Since most of the products are imported from other countries of origin, the price of oil affects shipping costs and unit costs of the merchandise. Offshore manufacturing delays are a cost concern. Little control exists over the suppliers of the raw products used in the manufacturing process. 65% of the company’s products are produced by only fourteen manufacturers. If they reach quotas or encounter quality control problems, these risks are passed on to the company. Risks can include disruption of supply from existing sources, and it may be difficult to obtain comparable quality at comparable cost. Since the manufacturers are not affiliates of the company, timely order completion is a risk as well. Even though demand increases, if the raw materials and manufacturing capability are not available, that is a factor in adversely affecting the company’s operations.
Chain of supply is also determined by the efficient running of ports where suppliers exist. The free flow of goods through worldwide ports needs to be assured on a steady basis. If it is not, significant distribution risks abound. Lockouts, strikes and disruptions can all influence smooth distribution of goods.
A third risk area evidenced in the Notes to the Financial Statement is that 94% of the net revenues were earned in North America. The company has limited experience in the international markets it is in, and operational and managerial talent may not be available to adequately address these concerns.
The company’s President in a recent Press Release stated that the company is poised as a growth company, and its success is driven by how the Under Armour brand is promoted for long-term growth. The company is committed to long-term scalability and sees opportunities beyond the current market and product mix that will proceed deeply into international markets (Subramanian & Gopalakrishna, 2012).
Cultural and language difficulties abound in international market. Limited brand recognition may occur in new markets. If the distribution efforts in other countries fail, then opportunities for revenue growth are very limited. Offshore risks are also related to production, since in 2013 the company’s products were manufactured by twenty-six manufacturers in nineteen countries. Sixty-five percent of the products came from Jordan, China, Philippines, Nicaragua, Malaysia, Cambodia, Indonesia, Vietnam, Mexico and Honduras. Exchange fluctuations and political risks in these countries are a final source of country-specific risk.
In combination, all of these country risks and macroeconomic risks mean that the company’s balance sheet stability and revenue generation rely on stability. Stability cannot be guaranteed. Suppliers, licensees and manufacturers are located not only outside the U.S. for the most part but they are independent. They are not under the company’s control, supervision or risk governance. The current financials must be evaluated with these factors in mind.
- Subramanian, R., & Gopalakrishna, P. (2012). Under Armour. Business Case Journal, 19(2). Retrieved from http://edb.pbclibrary.org
