Under Armour steps into footwear field

By David Kiley

updated 2:44 p.m. ET Jan. 31, 2008

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."

More from BusinessWeek A first run in Under Armour prototypes Under Armour: Hot growth Company profile: Under Armour

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.

MORE FROM BUSINESSWEEK

BusinessWeek Section Front

Let's Give Visas to Startup Founders Lessons from the Apple-Psystar Battle Treasury's Mortgage Modification: Empty Threats? Stocks Sink on Dubai Debt Worries IBM vs. SAS: The Battle over Data Analysis Software Picks of the Week: Microsoft, H-P, Goldman, TiVo Stock Picks: Microsoft, TiVo, J.Crew Stocks Gain on Recovery Optimism Central Bank Buying Spurs a Gold Rush Experts Talk About FOMC Minutes, GDP, and Home Prices BusinessWeek Section Front