Under Armour Inc. reported second-quarter results that came in better than Wall Street’s targets but it lowered its outlook for the year while unveiling a restructuring plan that will result in job cuts.

The company now expects operating income this year between $280 million to $300 million, down from its prior forecast of $320 million. Growth is expected to be 9 to 11 percent, down from 11 to 12 percent previously.

“Our second quarter performance validates the strength of our multiple growth levers to deliver solid results in today’s dynamic global environment,” said Under Armour chairman and CEO Kevin Plank. “More than doubling our business over the last three years has required significant investments and resources to build our brand. We are utilizing 2017 to ensure that operations across our diverse portfolio of sport categories, distribution channels and geographies are optimized as we are building a stronger, faster and smarter company.”

Restructuring Plan

Under Armour’s board of directors has approved a restructuring plan to more closely align its financial resources to support the company’s efforts to better serve the evolving needs of the changing consumer and customer landscape.

“As we stand up our category management structure within a consumer-led approach, we intend to meaningfully increase our go-to-market speed and amplify our digital capabilities,” continued Plank. “We’ve identified a number of areas to enhance our operational capabilities, drive process improvement and gain greater efficiencies. We remain steadfast in driving and building our brand while shifting our operational focus to become more return-on-investment and cost of capital centric – institutionalizing discipline to deliver more consistent, long-term shareholder value.”

In conjunction with this plan, the company expects to incur total estimated pre-tax restructuring and related charges of approximately $110-130 million in fiscal 2017, including approximately:

  • Up to $70 million in cash related charges, consisting of up to: $25 million in facility and lease terminations, $15 million in employee severance and benefits costs, and $30 million in contract termination and other restructuring charges; and,
  • Up to $60 million in non-cash charges comprised of approximately $20 million of inventory related charges and approximately $40 million of intangibles and other asset related impairments.

The company will cut 277 jobs across its operations, half of which will be at the company’s headquarters in Baltimore, Under Armour spokeswoman Diane Pelkey said. The cuts represent about 2 percent of its workforce. The company had about 15,200 employees as of Dec. 31, according to a regulatory filing.

Second Quarter Review

  • Revenue was up 9 percent to $1.1 billion, up 8 percent currency neutral.
  • Gross margin declined 190 basis points to 45.8 percent as benefits from channel and product mix were offset by inventory management initiatives, changes in foreign currency rates, and higher air freight in connection with our enterprise resource planning (ERP) system implementation, which impacted the timing of shipments to certain key customers.
  • SG&A expenses increased 10 percent to $503 million, or 46.2 percent of revenue (up 40 basis points), due to continued investments in the direct-to-consumer, footwear and international businesses.
  • Operating loss was $5 million. Including other interest and expense, there was a net loss of $12 million in the second quarter and a 3 cents loss in diluted earnings per share.
  • Inventory increased 8 percent to $1.2 billion.
  • Cash and cash equivalents increased 37 percent to $166 million.

Wall Street’s consensus estimate called for a loss of 7 cents a share on sales of $1.08 billion.

By category, sales of apparel rose 11.1 percent to $680.7 million. Footwear sales were down 2.4 percent to $236.9 million. Accessory sales climbed 21.7 percent to $122.6 million. Licensing revenues reached $25.1 million, up 19.5 percent.

By region, North America’s sales inched up 0.3 percent to $829.8 million. The region posted a loss of $5.42 million against operating earnings of $28.1 million in the same period a year ago.

The EMEA region widened its loss to $4.6 million from $2.96 million a year ago. Sales jumped 57.0 percent to $103.9 million. In the Asia-Pacific region, operating profits reached $15.2 million, up 53.8 percent. Sales climbed 88.8 percent to $93.6 million. In the Latin America region, the operating loss was $8.09 million, slightly down from $8.2 million a year ago. Sales were $38.0 million, up 10.4 percent.

The Connected Fitness unit lowered its operating loss to $1.9 million from $7.5 million a year ago. Connected Fitness sales were $22.97 million, down 2.2 percent.

Updated Fiscal 2017 Outlook

Key points related to Under Armour’s full year 2017 outlook include:

  • Net revenues expected to grow 9 to 11 percent versus the previous expectation of 11 to 12 percent growth, reflecting moderation in the company’s North American business.
  • Gross margin, on a reported basis, is expected to be down approximately 160 basis points compared to 46.4 percent in 2016 as benefits from product costs and sales mix are offset by impacts from the restructuring plan, changes in foreign currency and increased efforts to manage inventory. Excluding the impact of the restructuring, adjusted gross margin is expected to be down at least 120 basis points compared to 46.4 percent in 2016.
  • On a reported basis, operating income, is expected to reach approximately $160-180 million. Excluding the impact of the restructuring plan, adjusted operating income is expected to be approximately $280 million to $300 million.
  • Interest and other expense net of approximately $40 million;
  • An effective tax rate of 31 to 32 percent.
  • On a reported basis, full year diluted earnings per share is expected to be 18 to 21 cents a share. Excluding the impact of the restructuring plan, full year adjusted diluted earnings per share is expected to reach 37 to 40 cents; and,
  • Other full year assumptions include capital expenditures of approximately $350 million.

When it reported first-quarter earnings on April 27, Under Armour projected net revenues would grow 11 to 12 percent this year to reach nearly $5.4 billion, up 12 to 13 percent currency neutral. Gross margin was expected to be slightly down, operating income expected to reach approximately $320 million. The company did not provide a projection for EPS at the time. Wall Street’s average estimate had been 42 cents per share.

Photo courtesy Under Armour