Under Armour Inc. is planning to slash the number of suppliers from 200 to around 50 to 60, the company said in an email to S&P Global Market Intelligence.
"As Under Armour works toward a more efficient operating structure, we intend to go from roughly 200 factory partner groups down to about 50 to 60 for the vast majority of our sourcing over the next couple years," the company said, declining to elaborate further on its plans.
The supplier reduction, part of restructuring plan efforts Under Armour announced Aug. 1, will accomplish several things, according to analysts. It will put pressure on suppliers to offer Under Armour better prices. It will also allow the company to cut costs, improve margins and have better control over quality.
David Bergman, the company's CFO, said the company's inventory vendor base is large compared with the size of the company because Under Armour wanted to keep pace with the sales growth it was seeing. Under Armour posted full-year revenue growth of more than 20% for the past four fiscal years, according to S&P Capital IQ. For the fiscal year ended Dec. 31, 2016, the activewear maker's revenue grew 21.8% to $4.8 billion.
But Under Armour is now at a point where it can consolidate that base, which will help it to manage inventory and adjust payment terms as some of its suppliers become "preferred providers," Bergman explained during a presentation Sept. 6 at Goldman Sachs Group Inc.'s Annual Global Retailing Conference. It is estimated that Under Armour will grow 8.65% this fiscal year ending Dec. 31, achieving revenue of $5.2 billion, according to data provided by S&P Capital IQ.
The money saved from cost cutting will be reinvested in the business in areas such as Under Armour's international expansion as well as its women's business, sportswear and lifestyle products, Bergman said.
Commenting on the plan, the company will be able to control quality better with fewer suppliers, said John Tomlinson, head of consumer research at analytics firm M Science, a portfolio company of Leucadia National Corp.
"It sends a message to the supplier community to come up with their very best prices," said Andrea Weiss, founder of the consulting group The O Alliance. Weiss said that as companies pass the $1 billion sales mark and begin to approach $5 billion, they gain much more leverage with the factories. Consolidating its suppliers will help Under Armour boost its margins, Weiss said.
Under Armour announced its restructuring plan, with an eye toward cutting 2% of its workforce, or about 280 jobs.
That plan included spending $25 million on facility and lease terminations, $15 million on employee severance and benefits, $30 million in contract terminations, $20 million on inventory-related charges and $40 million on impairment of assets.
The company announced the restructuring plan the same day it cut its full-year operating profit outlook by half and lowered its revenue growth range for the fiscal year, citing a slowdown in North American sales.
Under Armour said it expects a full-year operating profit of between $160 million and $180 million, compared with previous guidance of $320 million. The company lowered its full-year revenue growth range from between 11% and 12% to between 9% and 11%. It generated revenue of $4.8 billion during its most recent fiscal year ending Dec. 31, 2016.
Meanwhile, Under Armour is preparing for a promotional environment in the second half similar to the first, Bergman said during the presentation. To address that challenge, the maker of athletic wear will offer a wider range of price points, more new products and more layering to "meet the needs of any change in the weather," he said, noting that the company has learned from mistakes it made last year.