By Thomas J. Ryan
Quickly finding a replacement for Sports Authority, Under Armour (NYSE:UA) on Tuesday revealed plans to start selling to Kohl’s starting in 2017.
To the dismay of many traditional sporting good chains that the brand founded its business on, Under Armour has been selling to traditional department stores such as Macy’s, Belk and Nordstrom over the last few years, as well as the athletic mall specialty chains, Foot Locker and Finish Line. Although its primary competitors, Nike and Adidas, have been there for years, Kohl’s will mark the first time the 20-year old brand is selling into the mid-tier department store channel.
Another big retail announcement was that Under Armour planned to open a mega-store in the famed FAO Schwarz flagship on New York City’s Fifth Avenue. Both came out while Under Armour reported second-quarter earnings that largely fell in line with a forecast given on May 31. At the time, Under Armour said a $23 million impairment write-off tied to Sports Authority’s bankruptcy would cause its operating earnings to land in the range of $17 million to $19 million. Operating earnings came in at the higher end of that range, hitting $19.4 million, albeit dropping 39.3 percent from year-ago levels due to the change.
Revenues in the quarter jumped 27.7 percent to $1 billion, in line with a forecast calling for growth in the high 20 percent range. Among categories, footwear – vaulting 58 percent – was again the standout, led by the Curry signature basketball line.
But the surprise was the move to Kohl’s.
On a conference call with analysts, Kevin Plank, chairman and CEO, described Kohl’s as “one of the top retailers of activewear in the U.S.” with a “large, loyal consumer base,” mainly women. Plank reiterated that the company is on track to expand its women’s business to $1 billion this year.
“This decision to reach new consumers through Kohl’s is not a channel consideration but a consumer consideration,” said Plank. “We want to reach our consumer where they expect to find Under Armour products, and we will continue to partner with retailers that provide us the opportunity to showcase the Under Armour brand.”
The brand will initially launch at 600 Kohl’s stores before expanding to all 1,100 locations.
During the Q&A session, Plank added that there was “nothing reactionary” about the decision to sell through Kohl’s, given its timing following Sports Authority’s abrupt exit. He described it as a “proactive move for us that has been in the works for the last several years.”
Plank noted that several years ago Under Armour did not have the merchandise expertise in place to differentiate its lines across individual channels and to also reach Kohl’s. Steering the effort to expand that capacity has been Kevin Eskridge, who has been the company’s SVP, global merchandising since April 2015. Previously, Eskridge ran China for Under Armour from October 2012, and prior to that led its successful outdoor push.
“We believe that there’s a massive opportunity with the consumer that’s walking into those stores and looking for the Under Armour brand, and frankly, they just haven’t been able to find it,” Plank said of Kohl’s.
He further said the brand would “continue to have elevated product in there” at Kohl’s, and the push into Kohl’s should not dilute its margins.
Plank added, “We don’t anticipate a big impact to the balance of our other businesses because of the merchandising time, effort and energy that we put in. So we think we are ready for this moment, and we are incredibly excited. And, again, this is just another one of the single chapters in our larger growth story.”
Overall, the decision to start selling to Kohl’s was part of a strategic push to reach a wider range of customers across three areas: channels, categories and geographies.
“We have built our business over the past 20 years through great retail partnerships within the sporting goods channel with partners like Dick’s Sporting Goods and Academy,” said Plank. “And in department stores and malls like partners like Macy’s, Foot Locker, Champs and Finish Line. The authenticity we’ve gained with consumers through those partnerships has helped us become who we are today and positioned us to bring Under Armour to an even broader set of consumers.”
Also as part of the channel push, Under Armour disclosed plans to move into the former FAO Schwarz space on Fifth Avenue in New York City as soon as 2018. The store closed in July 2015. It had been the oldest toy store in the U.S., with a New York City location since 1870.
Plank said it’s part of the firm’s strategy to use “landmark retail space” to tell the Under Armour story, to build its brand and sales. He added, “The approximately 53,000-square-foot space is one of the most recognized and high traffic areas in all of New York, and our plan is to build the most breathtaking and exciting consumer experience ever conceived at retail.”
To broaden its customer base around categories, Plank noted that UAS, a premium fashion sportswear line, would launch in September. The line is being developed by Tim Coppens, who previously worked at Ralph Lauren and Adidas but is best known for the namesake fashion collection he runs in New York. The pending launch and hiring was revealed earlier this year.
“This is not about being on trend or capturing the athleisure market,” said Plank on the call. “Consumers have the expectation that performance product is not just functional but is fully executed through fit and style.”
He sees the collection as an opportunity for customers to not just wear the brand on the field or at the gym, but “to wear us to school, out at night and other wearing occasions.”
UAS will reach select high-end wholesale partners, including a limited range at Gucci stores, but will predominantly be a direct-to-consumer (DTC) offering.
In expanding across geographies a primary focus, not surprisingly, is China. Plank noted that the brand is experiencing “powerful growth” in China, with e-commerce sales ahead 157 percent year-to-date. Strong full-price sales are being seen with a focus on basketball, running and training. It’s helped by the government’s support of sports and a Chinese consumer “getting more serious about training.”
China’s strong women’s business is also helping to increase sales, up 24 percent year-to-date over last year and representing 34 percent of apparel sales, and more than doubling the brand’s overall run business. Stephen Curry’s growing global awareness is also boosting sales, and a second Curry tour will take place in China later this summer.
The continued success of the basketball category, led by the Curry signature basketball line, led to a 58.0 percent gain in overall footwear sales in the quarter, to $242.7 million. Also contributing to the category’s success was growth in running and cleated categories in both team sports and golf.
Apparel sales advanced 18.9 percent to $612.8 million, led by growth in men’s training, women’s training and golf. Accessories revenues increased 21.3 percent to $101 million, driven primarily by its new lines of bags and headwear.
Wholesale revenues in the quarter grew 26.7 percent year-over-year to $635 million, while DTC revenues grew 27.9 percent to $321 million, representing 32 percent in total sales. North America revenues were ahead 22 percent while International revenues, which represented 15 percent of total net revenues for the quarter, grew 68 percent year-over-year, or 72 percent on a currency-neutral basis.
Licensing revenues expanded 16.0 percent to $21 million, while Connected Fitness segment sales surged 73.3 percent to $23.5 million.
Gross margins eroded to 47.7 percent compared with 48.4 percent, reflecting negative impacts of approximately 130 basis points from a sales mix driven by strong growth in footwear and international, partially offset by approximately 50 basis points from improved product cost margins.
SG&A expenses grew 32 percent to $458 million, including the impact of the one-time impairment related to the Sports Authority liquidation and continued investments in DTC and overall headcount to support the company’s strategic initiatives. As a percent of sales, SG&A grew to 45.8 percent from 44.3 percent a year ago.
Net income fell 57 percent to $6.3 million, or 15 cents a share, in line with estimates.
Under Armour kept its guidance for the full year. The company expects revenues to reach about $4.93 billion, representing growth of 24 percent over 2015, and 2016 operating income in the range of $440 million to $445 million, representing growth of 8 to 9 percent over 2015.
Prior to the May 31 update, the company had expected revenues to increase at a 26 percent rate. Due to the bankruptcy, the company had said it was only able to recognize $43 million of the originally planned $163 million in revenues with Sports Authority for 2016. Operating earnings had previously been expected to expand in the range of 23 to 24 percent over 2015.
Other growth avenues highlighted by Plank on the call included digital.
In June, Under Armour introduced the UA shop app that’s more integrated with its Connected Fitness platform. Under Armour is also making strides in personalizing offers to its Connected Fitness members based on their activities and location.
Marketing also remains a primary investment for growth. Under Armour will have four times as many athletes at the Rio Olympics compared to London, including Michael Phelps, Andy Murray and Natasha Hastings.
In the U.K., Tottenham Hotspur qualified for champion play this season, and Southampton will be playing Europa league football in their first season in Under Armour kits next month. Revenues in the U.K. more than doubled in the second quarter. Plank added, “The U.K. is far and away our largest market in Europe, so we’re driving awareness to places that moved the needle for business.”
In the U.S., Under Armour recently signed UCLA and Cal Berkeley. Plank noted that California represents roughly 12 percent of the U.S. population. Sports Authority also closed many doors in California and Plank noted that Kohl’s has 100 stores across the state. Plank added, “This is a great example of how we’re thinking all the way through all the assets that we could bring to bear to get after the opportunity in that very, very key market.”
Lead photo courtesy Under Armour
