Under Armour renegotiating college deals

Pandemic pushing company to save money

If Under Armour has its way, its logo would disappear from players’ uniforms and athletic facilities at UCLA, ending one of the apparel maker’s most aggressive efforts to achieve brand dominance through an endorsement.

Reeling from losses and store shutdowns during the coronavirus pandemic, Under Armour confirmed Saturday that it is suspending its record $280 million contract to outfit UCLA athletes over 15 years. UCLA officials countered that they are exploring options to stop that from happening.

Under Armour also is seeking to end its 10-year, $86 million deal to outfit players at University of California, Berkeley, which is contesting the move as well, the Financial Times reported Tuesday. And Boston College said Tuesday that it is in talks with Under Armour about its deal, which expires in 2024.

With the economy in desperate straits, it is not surprising that the once high-flying Baltimore-based company is looking to scuttle such deals or renegotiate them, some observers said. If successful, such moves could save it millions of dollars immediately.

The athletic apparel brand has been struggling for several years with faltering sales in its key North American market and has been attempting to engineer a turnaround only to see the pandemic decimate the economy and consumer demand along with it.

Most brands are struggling and looking to control expenses during the current economic crisis, said Matt Powell, a senior industry adviser for sports

for the NPD Group. It’s likely that Under Armour is working to renegotiate or even end other deals, too, though endorsements with athletes and teams are still viable ways of marketing, he said.

For Under Armour, he speculated that “they’re going to try to find new ways to do this, less expensive ways to do this.”

That’s because Under Armour is a different company today than it was when it signed such deals four years ago, shrinking instead of growing, said Karyl Leggio, a finance professor at Loyola University Maryland.

“It was a winner’s curse kind of deal,” Leggio said. “Under Armour won over Nike and Adidas to get the contract, but in all likelihood they overpaid and UCLA underperformed, and then coronovirus hit.”

Under Armour finds itself in a tough spot looking for ways to conserve cash, cutting back in the very places where the sports fans it targets are most likely to engage with and then purchase the brand, she said. She worries that abandoning such deals may not be good for the company in the long run.

“Given that sports teams aren’t going on the field, you can see why Under Armour is pursuing this as a cost-saving measure,” Leggio said. But, she added, “backing out of college athletics just will make future deals in the performance space much more difficult.”

In a statement Saturday, Under Armour said it recently decided to end the UCLA partnership, “as we have been paying for marketing benefits that we have not received for an extended time period. The agreement allows us to terminate in such an event and we are exercising that right.”

Under Armour is under contract to pay $679 million, at a minimum, over at least the next five years in total in sponsorships with professional teams and leagues, colleges and universities, athletes, athletic events and other marketing commitments, the company said in its 2019 annual report. Of that, $131 million is due by the end of this year.

Under Armour did not respond to questions this week about whether it expects to discontinue team outfitting deals with other universities’ athletic programs or whether it has renegotiated athlete endorsement deals.

In May, Under Armour executives said they had begun renegotiating athlete endorsers’ contracts.

“We’ve been negotiating and working with them, and we’ve been able to get some extended payment terms there, which are helpful just in general with our overall capital preservation efforts,” said David Bergman, Under Armour’s chief financial officer, at the time.

He did not disclose further details on specific athletes. The brand has marketing agreements with athletes across a range of sports, including higher-profile names such as Stephen Curry, Michael Phelps, Misty Copeland, Lindsey Vonn, Tom Brady and Bryce Harper.

It was unclear what steps UCLA might take. A spokeswoman said the university had no updates beyond a statement issued Saturday in which it said UCLA Athletics found out last week that the brand is attempting to terminate the apparel and footwear contract and that it was exploring all options to resist Under Armour’s actions.

UC Berkeley’s athletics department questioned whether Under Armour can terminate their deal.

“While we understand that we are in challenging times, wehave been and remain committed to our partnership with Under Armour,” the university said in a statement. “We are confident that we are fulfilling the terms of our agreement and that Under Armour does not have grounds for termination.”

Under Armour’s done this before, dropping an outfitting deal in 2018 with Major League Baseball, which leapt into the waiting arms of Nike.

Bob Dorfman, a sports marketing expert and creative director at Baker Street Advertising in San Francisco, said the breakup with UCLA makes sense.

“I think it’s two brands that are not doing well and in flux,” Dorfman said. “It doesn’t look good for Under Armour because they made such a huge deal, and it was such a marquee deal at the time.”

And with college sports struggling, “UCLA just isn’t the powerhouse that it used to be,” he said. “Maybe when [Under Armour] did the deal they were expecting bigger things from UCLA,” and its football and basketball programs.

WhenUnder Armour wooed UCLAfrom rival Adidas in 2016, just weeks after signing UC Berkeley, the affiliation with a storied athletic program was expected to pay off big in brand exposure, product sales and establishment of a big-name foothold in Nike territory on the West Coast. At the time, Under Armour’s sales were soaring and, during the previous two years, it had signed the University of Wisconsin and Notre Dame.

Still, it was seen as a risky move, even then.

In a November 2016 report, Stifel analyst Jim Duffy warned that Under Armour’s aggressive commitments during those years, accounting for about 2.6% of sales but expected to grow, would “set a high bar for revenue growth,” and could weaken earnings power if sales growth slowed even modestly. Sales growth would need to be maintained in the 20% range, the report said.

But that didn’t happen. Under Armour’s growth faltered and the company has struggled to reorganize and refocus its business and offerings for the past few years. Then the pandemic hit, forcing most stores around the globe to close since mid-March. Sales fell 23% in the first quarter and the company reported a loss of $590 million.

NPD’s Powell said he has long had concerns about brands spending big on endorsement deals.

“In the last couple of years we got into an arms race among the brands for these deals and the price just continues to go up,” he said. “Whatever the brand, if you do the math, and what it will cost to earn merchandise sales, you can’t make it work.”

Still, Powell thinks Under Armour “is stacking up to be in good shape” to emerge from the coronavirus economic crisis.

In the past, he has criticized the brand for its focus on performance apparel to the exclusion of popular athleisure wear.

But that focus may position Under Armour to capitalize on a newfound focus on health and fitness and activities such as running. While retail sneaker sales have been down overall, sales of running shoes were up as of mid-May, he said.

Health and fitness may be more top of mind in the midst of and emerging from the virus, said Sam Poser, a footwear and apparel Research Analyst with Susquehanna Financial Group. But Under Armour still might not be consumers’ first choice of athletic brand, Poser said.

With the ending of the UCLA deal, “they’re trying to cut their way out of trouble,” he said. “You need to cut, but you need to have compelling product that’s accessible to a broad market.”

“They have hung their hat on performance,” at a time when many consumers buy athletic wear for sports as well as for every day, he said. “If you’re going to focus completely on performance athletes, then you’re going to be focused on a much narrower audience than if you’re trying to get people to engage your brand across occasions.”