One of the most intriguing COVID silver linings was the opportunity for massive companies to pivot. For the apparel industry, those pivots have been largely consistent across subsegments and price points: Increase direct-to-consumer sales while cutting ties with undifferentiated retailers, focus on controlling inventory to minimize promotional activity, and consolidate the product portfolio. Brands like Nike, Lululemon and Under Armour began their transformations well before the pandemic, but lockdowns and overnight consumer behavior shifts prompted the creative boardroom ideas to actually be implemented.
When the world was in flux last summer, the demand picture was blurred with stimulus-driven consumer demand rebounding faster than anticipated offset with surging COVID cases and a heated presidential race. Many apparel companies, faced with a decision unheard of for many years, decided to leave sales on the table. In hindsight, given the transportation delays that pushed holiday deliveries into the first quarter, and after seeing public brands post margin growth in 2020, it was the right decision. But now, in 2021, after a year of poor apparel sales ex-sweats, there’s plenty of temptation to bite the forbidden fruit and revert to habitual overordering.
This is especially true for Under Armour, which is in the midst of a major makeover and seeing strong demand. In EP8 of the Point of Sale Show, Simeon Siegel, BMO Capital Markets retail analyst, pointed to Under Armour as a company that creatively improved its business during the pandemic. “They were able to apply something other than closing stores as a fix,” he said. Through proactive demand constraints and tight inventory management, Under Armour is in the healthiest position it’s been in a long time. The company is exiting dozens of retailers it deemed as undifferentiated, including a significant reduction in sales to the off-price channel and overall promotional activities.
It wasn’t too long ago when the idea of Under Armour constraining anything, let alone demand, was unthinkable. After years of overproducing and bad retailer partnerships, Under Armour’s brand had been watered down. And profits sank with its image. But, with a new CEO at the helm and new long-term strategy in place, things are changing. “You’re looking at a huge brand that sold a lot of product and didn’t make any money realize that doesn’t make sense. We sell cloth,” Siegel said candidly in reference to Under Armour’s transition.
Can Under Armour keep it up? When asked what the one thing he’s watching for in the 2021 retail landscape, Siegel said it was which companies would bring forth the inventory lessons to a post-pandemic environment. “If 2020 gave pricing power, the question is who will hold the promotional line and who’s going to cross it.” In Q1, Under Armour posted better-than-expected margins on strong demand, which should give executives hope that the strategy can work into the future.
The one thing brands can control is how much they buy. If Under Armour is going to hold less inventory, it must ensure it is a) holding the right stuff; b) has it in the right location; and c) can deliver it on time (to home or store). By managing how much inventory flows through its supply chain, UA can limit low-demand products and focus on the fastest-moving SKUs.
But with less inventory comes a higher risk of empty shelves and disgruntled customers. So, within a tighter inventory strategy, there must be an efficient and effective supply chain. CFO Dave Bergman noted Under Armour’s supply chain has been “navigating it fairly well at this point.”
In addition to improving margins and boosting brand image, cutting ties with retailers simplifies Under Armour’s supply chain. One of the company’s proactive demand constraints is closing accounts with undifferentiated retailers. President and CEO Patrik Frisk estimated the company would be exiting between 2,000 and 3,000 retail doors this year. According to Frisk, this allows the company to have “the right product at the right place but not necessarily spreading ourselves so thin.”
He continued saying the reality is that “we won’t have a tremendous amount of opportunity to capitalize on accelerating demand beyond what we’re actually seeing.” because “we are constraining ourselves.”
Final thoughts. Leaving sales on the table for any apparel brand, especially Under Armour, has been out of the realm of possibility for the past decade. But post-pandemic UA is doing just that. During the Q1 call, Frisk said “chasing demand” is not something the company will do much of in 2021, particularly with “everything that’s happening in supply chain.”
While the company ensured its supply chain was navigating fairly well, it also guided for higher transportation costs throughout the year, citing container availability and port congestion as it works through ongoing logistics and transportation challenges.
With transportation costs, both maritime and land transport, at or near all-time highs and commodity prices soaring across the board, it’s an exceptional time to streamline distribution and simplify supply chains.
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