Under Armour President, CEO and Director Stephanie Linnartz was the latest in a long string of industry chief executives that used the word “challenging” in the first few sentences to open their quarterly conference calls with analysts and letters to investors as earnings season commenced. It is clearly a market that has a different view than some on Wall Street who still think that the retail market is just rolling along, everyone has a job, and that inflation is a conversation from the past. The good thing for Linnartz and her comments is that she did not have to use the word “disappointing” as two other leaders at large active lifestyle companies did last week.
Under Armour revenues, while down, thanks to the North American market, were said to be in line with the company’s November outlook and earnings came in better than expected.
“With respect to driving U.S. sales, this remains a multi-year journey and candidly, we have much more work to do to become a healthier business capable of returning to growth in our largest market,” Linnartz said. “As detailed previously, inconsistency has permeated our U.S. business over the past years. And how we go to market across consumers, customers and geographies, how our product is created and delivered with a consistent design language, channel segmentation, and how we show up in our own physical and digital businesses. With a critical mass of work underway and additional analysis that will yield more work and decision points in the months ahead, we are on the right path to addressing these inconsistencies and turning them into strengths.”
The CEO went on to say that all of this will take time, and it starts with leadership.
“To drive success, the right talent must be in the right places, with the trust and the freedom necessary to empower execution,” she continued. “Bolstering our leadership was amongst my highest priorities in my first year at UA, and we’ve made excellent progress. Since last summer, we’ve added several new experienced officers to lead our product, design, consumer, supply chain, and communications teams. Additionally, we named a nine-year company veteran to lead our America’s region and announced the return of a UA veteran to head our EMEA business.”
Linnartz also outlined how the company has streamlined its business to be more responsive, including its marketing functions, where they recently consolidated the global and North American teams, who will now report to a new chief marketing officer, a search that’s underway.
She said the unification will bring a cleaner, integrated approach to empower faster decision-making to accelerate our ability to connect more deeply with consumers.
“About two-thirds of my executive leadership team is new compared to last year,” Linnartz continued. “And each of these leadership changes is tied directly to the inconsistencies I mentioned earlier, so we are making good progress in hitting challenges head-on. The next steps are activating and empowering these teams to drive our strategic priorities. Creating a future flywheel of operational excellence and execution that drives consistency back into our business.”
Looking at the fiscal third quarter ended December 31, CFO Dave Bergman said revenue was down 6 percent to $1.5 billion, which aligned with the company’s outlook.
On a regional basis, North America revenue declined by 12 percent, coming in at $915 million, which Berman said was in line with expectations as well.
Wholesale was said to be “down meaningfully” due to challenges in the brand’s full-price business, partially offset by growth related to inventory management strategies, which included increased sales to the off-price channel. He said the North American DTC business was down slightly during the quarter.
“During the third quarter, our North American business was down 12 percent, which I will note was in line with our expectations and reflective of a challenging wholesale environment in the U.S. and softer demand,” Linnartz added. “Here, we remain focused on serving our retail partners and working with them to optimize our assortment and segmentation, ensuring greater overall consistency and profitability.”
“In our North American DTC business, I’d highlight that underneath flattish results in the quarter, we are encouraged by specific operational gains made during the crucial holiday period,” Linnartz shared. “These included exceptional customer service scorecards, elevated talent across our fleet, and significantly improved in stock levels. Thus, our work to become a better retailer is beginning to shine through. We are also progressing on our new full-price Brand House design and are set to test a smaller, easier-to-navigate format with a more premium and curated product positioning.”
Linnartz also highlighted the company’s member program.
“One of the bright spots for our North American DTC business continues to be our UA Rewards Loyalty Program with encouraging member engagement and spending trends,” she continued. Our enrollment has hit nearly 3 million members, which is well ahead of the target we set for fiscal ‘24. Our members continue to show a higher premium purchase frequency than non-members in these early months. We drove engagement during the third quarter via our first ever members week, along with eight members-only holiday campaigns, which directly contributed to peak holiday business.”
Linnartz said UA is also working to improve the digital business.
“Given that our North American e-commerce channel has been tempered during fiscal ‘24, as we turn to fiscal 2025, we are exploring plans to reduce our promotional dependence to create a more premium online presence. Simply put, ua.com will become a showcase for our brand. We have done a lot of work to make our website more functional to increase conversion, but we must create a more premium shopping experience to elevate the brand,” she concluded.
EMEA revenue was up 7 percent to $284 million, or up 2 percent on a currency-neutral basis.
“This was driven by strong growth in our DTC business, related to improved traffic trends across our retail and e-commerce channels,” Bergman detailed. “Our EMEA wholesale business was also up during the quarter.”
APAC revenue was said to be up 7 percent to $212 million, or up 8 percent on a currency-neutral basis.
“We saw solid sales growth within our retail stores, and wholesale was also up during the quarter,” Berman added. “China was a leading contributor to third-quarter growth.”
Latin American sales were up 9 percent to $70 million in the quarter, or up 3 percent on a currency-neutral basis.
From a channel perspective, Wholesale revenue was down 13 percent to $712 million, with decreases in the company’s full-price and distributor businesses, partially offset by higher sales to the off-price channel.
Direct consumer revenue increased by 4 percent to $741 million, due to a 5 percent increase in owned and operated store revenue, and a 2 percent increase in the e-commerce business.
Licensing revenue decreased 2 percent in the quarter to $29 million, driven by declines in the Japanese and North American licensee businesses.
Total global Apparel revenue was down 6 percent, which Berman said was driven primarily by declines in the training and outdoor businesses, partially offset by strength in the sideline and basketball categories.
Global Footwear was down 7 percent, reportedly due to a tough comparison and softer demand, primarily in North America.
“As a reminder, we had robust growth during the third quarter of fiscal 2023 as a significant volume of footwear products that were previously delayed due to COVID-related factory constraints meaningfully hit the market,” the CFO noted.
The Global Accessories business was said to be flat year-over-year.
Gross margin was up 100 basis points to 45.2 percent of sales in the third quarter, reportedly driven by approximately 260 basis points of supply chain benefits, mainly due to lower freight costs.
Berman said those tailwinds were better than previous expectations and were responsible for most of the overage on gross margin.
“These benefits were partially offset by 140 basis points of unfavorable pricing due to increased promotional activities in our DTC business, our proactive strategy to reduce inventory through our factory houses, and deeper discounts in our sales to the off-price channel, along with about 20 basis points of unfavorable foreign currency impacts,” he added.
SG&A expenses were flat year-over-year at $602 million. Excluding a $23 million litigation reserve expense, adjusted SG&A expenses were said to be down 4 percent to $579 million.
Operating income was $70 million, and excluding our litigation reserve expense, our adjusted operating income was $92 million, which was above our outlook of $65 million to $75 million due to the gross margin overdrive and lower SG&A.
After tax, UA realized a net income of $114 million, or 26 cents of diluted earnings per share. Excluding a $50 million benefit from the company’s final earn-out on the sale of the MyFitnessPal platform and a $23 million litigation reserve expense, along with the related tax impacts of each, adjusted net income was $84 million, or 19 cents of adjusted diluted earnings per share.
“This came in above our third quarter outlook of 9 cents to 11 cents, due to our adjusted operating income overdrive and favorability on the other expense and tax lines,” Berman explained.
At the end of the third quarter, inventory was reportedly down 9 percent to $1.1 billion as the company “trended toward normalized levels,” Berman said.
“This was in line with our outlook,” he added. “And as we end the year, we anticipate our inventory to be down at a mid-teen percentage rate, which should put us close to $1 billion.”
Cash and cash equivalents were $1 billion AT quarter-end, and UA had no borrowings under its $1.1 billion revolving credit facility. The company repurchased $25 million of Class C common stock during the third quarter.
“This concluded our two-year $500 million program announced in February of 2022, thus retiring $45.6 million previously outstanding shares,” Berman announced.
Looking ahead, Berman said they have tightened their revenue expectation to a 3 percent to 4 percent decline for the full year, which is within the previous range of down 2 percent to 4 percent.
“This shift within the range represents continued softer wholesale revenue,” Berman added. “Breaking this down further, we now expect revenue in North America to be down at a high-single-digit rate versus the previous expectation of a 5 percent to 7 percent decline. And we now expect our International business to be down at a high-single-digit rate versus the previous low-double-digit rate increase. From a product perspective, we expect our apparel and footwear businesses to both be down at a low-single-digit percentage rate for the full year.”
Gross margin is forecast to be up 120 to 130 basis points versus the previous expectation of a 100 to 125 basis point increase.
“This improvement is related to supply chain benefits and lower than expected full-year sales to the off-price channel,” the CFO noted.
Full-year SG&A is expected to be “flat to down slightly,” which is unchanged from previous expectations.
Reported operating income is expected to reach $287 million to $297 million.
Excluding the company’s litigation reserve, adjusted operating income is expected to reach $310 million to $320 million.
“Putting it all together, our reported diluted earnings per share is expected to be 57 cents to 59 cents, which includes a 12 cents after-tax benefit from our final earn-out on the sale of the MyFitnessPal platform and a 5 cents negative impact from our litigation reserve. Excluding these net positive impacts of 7 cents, we expect adjusted diluted earnings per share to be between 50 cents and 52 cents.
“So, to close, we remain encouraged by our evolving strategies to turn our inconsistencies into strengths,” Berman concluded in his prepared comments. “At the same time, we are maintaining a cautious view of the market, and we will continue to work the levers of our P&L to deliver appropriate financial performance while positioning the company for long-term growth. That means managing our supply chain to maximize gross margin opportunities, tightening expenses, optimizing investments, focusing on cash management and making prudent capital expenditures in the near- to mid-term.”
Updated Fiscal 2024 Outlook
Key points related to Under Armour’s fiscal year 2024 outlook include:
- Revenue is expected to be down 3 percent to 4 percent, tightening the previous expectation of a 2 percent to 4 percent decline;
- Gross margin is expected to be up 120 to 130 basis points, an increase from the prior expectation of a 100 to 125 basis point increase;
- SG&A expenses are unchanged from the previous expectation of “flat to down slightly”;
- Operating Income is expected to reach $287 million to $297 million. Excluding the company’s litigation reserve, adjusted operating Income is expected to be $310 million to $320 million;
- Diluted earnings per share are expected to be 57 cents to 59 cents a share, which includes 12 cents per share of after-tax benefit from the company’s final earn-out in connection with the sale of the MyFitnessPal platform and 5 cents of negative impact from the company’s litigation reserve. Excluding these net positive impacts of 7 cents, the company expects its Adjusted diluted EPS to be 50 cents to 52 cents for the year;
- Capital expenditures are now expected to reach between $210 million and $230 million versus the previous expectation of $230 million and $250 million.
Image courtesy Under Armour