Under Armour slashed its sales and profit outlook for the year due to “lower North American demand and operational challenges.” Sales in the second quarter also fell short of Wall Street’s targets.
Under Armour said it now expects sales for the year to rise in the low single digits, compared to a previous forecast of growth of 9-11 percent. Adjusted earnings are expected to arrive in the range of 18 cents to 20 cents per share, compared to previous expectations of 37 cents to 40 cents.
The company had already reduced its guidance when reporting second-quarter results on August 1.
Earnings on an adjusted basis in the second quarter came in at 22 cents a share, which topped Wall Street’s consensus estimate of 19 cents a share. Revenues came in at $1.4 billion, down from Wall Street’s average target of $1.5 billion.
“While our international business continues to deliver against our ambition of building a global brand, operational challenges and lower demand in North America resulted in third quarter revenue that was below our expectations,” said Under Armour Chairman and CEO Kevin Plank. “Based on these issues in our largest market, we believe it is prudent to reduce our sales and earnings outlook for the remainder of 2017. Against this difficult backdrop, our management team is working aggressively to evolve our strategy and level of execution to proactively address these challenges. We understand that success in our next chapter requires managing with focused financial discipline and driving excellence into every area of our business while we amplify innovation, deliver fresh product and connect even more deeply with our consumers.”
In the third quarter of 2017, in connection with the company’s restructuring plan, it recognized pre-tax costs totaling $89 million comprising of $22 million in cash-related charges and $67 million in non-cash charges. The restructuring plan was announced in August.
Adjusted financial measures exclude the impact of the restructuring and other related charges and the related tax effects.
Third Quarter Review
- Revenue was down 5 percent to $1.4 billion. During the third quarter, operational challenges due to the implementation of the company’s enterprise resource planning system and related service levels along with lower North American demand negatively impacted revenue.
- Gross margin declined 160 basis points to 45.9 percent as benefits from changes in foreign currency rates and product costs were more than offset by pricing and other inventory management initiatives, and regional mix. Adjusted gross margin, which excludes a $4 million impact from restructuring efforts, was 46.2 percent, a decrease of 130 basis points compared to the prior year.
- SG&A was in-line with the prior year.
- Restructuring and impairment charges were $85 million.
- Operating income was $62 million, down from $199.3 million a year ago. Adjusted operating income was $151 million.
- Effective tax rate was negative 5 percent due to higher mix of international pre-tax income and challenged results in the North American business, coupled with the impact of the restructuring and impairment charges. The adjusted effective tax rate was 29 percent.
- Net income was $54 million in the third quarter. Adjusted net income was $100 million.
- Diluted earnings per share was 12 cents a share. Adjusted diluted earnings per share was 22 cents.
- Inventory increased 22 percent to $1.2 billion.
- Cash and cash equivalents increased 43 percent to $258 million.
By category, apparel declined 8. percent to $939.4 million. Footwear inched up 2.2 percent to $285.1 million. Accessories were up 1.4 percent to $123.5 million.
By region, sales in the North America region slid 12.1 percent to $1.08 billion and was down 12.3 percent on a currency-neutral basis. Operating profits slumped 64 percent to $65.8 million.
In other regions, sales rose 21.7 percent to $127.9 million in the EMEA region and gained 19.8 percent on a currency-neutral basis. Earnings doubled to $17 million from $8.5 million.
In the Asia Pacific region, revenues jumped 51.9 to $130.3 million and climbed 53 percent on a currency-neutral basis. Operating income improved 25.9 percent to $34.2 million.
In the Latin America region, sales rose 32.8 percent to $46.9 million and added 23.4 percent on a currency-neutral basis. The operating loss in the Latin America region was due to $10.2 million from $10.6 million.
In the Connected Fitness segment, sales climbed 15.9 precent to $23.4 million. Connected Fitness showed an operating loss of $44.6 million against a loss of $8.5 million a year ago.
Updated Fiscal 2017 Outlook
Key points related to Under Armour’s full year 2017 updated outlook include:
- Net revenue is expected to be up at a low-single-digit percentage rate, reflecting lower North American demand and operational challenges due to the implementation of the company’s enterprise resource planning system and related service levels.
- Gross margin is expected to be down approximately 220 basis points compared to 46.4 percent in 2016 as benefits from product costs and channel mix are more than offset by increased efforts to manage inventory within a highly promotional environment, impacts from the restructuring plan and increasing regional mix. Adjusted gross margin is expected to be down approximately 190 basis points compared to 46.4 percent in 2016.
- Operating income is expected to be approximately $0 to $10 million. Adjusted operating income is expected to reach $140 million to $150 million.
- Interest and other expense net of approximately $35 million.
- Excluding the effect of the restructuring plan, adjusted effective tax rate of approximately 23 percent.
- Adjusted diluted earnings per share of 18 cents to 20 cents.
- Capital expenditures of approximately $300 million.
On August 1, the company announced a restructuring plan that detailed expectations to incur total estimated pre-tax restructuring and related charges of approximately $110 million to $130 million. In the third quarter, the company recognized $60 million of pre-tax charges in connection with this restructuring plan. In addition to these charges, the company also recognized restructuring-related goodwill impairment charges of $29 million for its Connected Fitness business. Inclusive of this impairment, the company now expects to incur total estimated pre-tax restructuring and related charges of approximately $140 million to $150 million.
Under its former guidance:
- Net sales were expected to grow 9 to 11 percent.
- Gross margin, on a reported basis, was expected to be down 160 basis points compared to 46.4 percent. Excluding the impact of the restructuring, adjusted gross margin was expected to be down at least 120 basis points compared to 46.4 percent in 2016.
- On a reported basis, operating income, was expected to reach approximately $160-180 million. Excluding the impact of the restructuring plan, adjusted operating income was expected to be approximately $280 million to $300 million.
- On a reported basis, full year EPS was expected to range between 18 to 21 cents. Excluding the impact of the restructuring plan, adjusted EPS was expected to reach 37 to 40 cents a share.
- Capital expenditures were expected to be approximately $350 million.
Photo courtesy Under Armour