Under Armour reported results for the fiscal first quarter ended June 30 came in line with expectations amid progress reducing inventory levels while reiterating its overall guidance for the year. However, sales guidance was reduced for North America as the brand was unable to overcome due to stubborn challenges at U.S. wholesale.

“Following a few quarters of pressure in our apparel business, our first quarter performance saw an impact from the persistent promotional environment in the challenging North American retail environment,” said Stephanie Linnartz, who joined Under Armour as president and CEO in late February, on a call with analysts.

Linnartz stressed that reviving U.S. sales remains one of the brand’s three strategic priorities under its recently-launched PTH3 (Protect This House Three) strategy.

North American revenues for its fiscal year ended March 31, 2024 are now projected to decline between 3 percent and 4 percent due to weaker-than-expected wholesale orders for the calendar third and fourth quarter. When reporting fiscal fourth-quarter results on May 6, UA had predicted North American sales would be “down slightly.”

Under Armour still expects overall revenue will be flat to up slightly versus FY23 as the company now expects international sales to be up at a low double-digit rate as momentum continues in EMEA and APAC regions. Previously, UA had guided international growth to climb mid-single digits.

In the first quarter, sales were down 2.4 percent to $1.2 billion, slightly ahead of Wall Street’s consensus target of $1.29 billion. Sales were down 1 percent on a currency-neutral basis.

North American Sales Down 9 Percent In Q1
In North America, sales in the quarter were down 9 percent to $826.7 million, roughly in line with expectations and the result of challenges in the U.S. wholesale channel due to elevated sector-wide inventories and ongoing promotional activities. David Bergman, CFO, said U.S. wholesale pressures are expected to “ease as the year progresses.” He added that the first quarter should be the largest decline in North America this year.

Internationally, revenue in the EMEA region grew 10.5 reported (+11 percent currency-neutral) to $226.6 million during the quarter with a solid performance at wholesale and strong growth in DTC (direct-to-consumer).

Asia Pacific’s sales were up 14.5 percent (+21 percent currency-neutral) to $202.2 million, fueled by steady improvements in retail traffic and post-COVID normalization. Like EMEA, a solid performance was seen at wholesale and DTC. In Latin America, revenue grew 13 percent (+5 percent currency-neutral) to $55.7 million, again with favorable wholesale and DTC channel results.

By channel, wholesale revenue on a global basis was down 6.3 percent to $742 million. Increases in distributor and its off-price channel businesses were more than offset by lower sales to the full-price channel amid U.S. wholesale challenges. DTC’s revenue advanced 4.5 percent to $544 million, driven by solid performances in its e-commerce and retail channels. Licensing revenue was down 10.9 percent in the quarter to $25 million, driven by softness at its Japanese licensee and North American business.

By category, apparel revenue was down 5 percent to $824.7 million, driven primarily by softer sales in training due to the ongoing pressure in North American wholesale. Footwear gained 4.7 to $363.7 million, driven primarily by strength in run. Accessories sales were up 1.1 percent to $97.9 million.

Gross Margins Decline 60 Basis Points
Gross margins eroded 60 basis points year-over-year to 46.1 percent. Margin pressures included a 300-basis points impact from higher promotional activity within its DTC business to clear prior-season inventory as well as unfavorable pricing related to sales to the off-price channel. The quarter also included 70 basis points of negative impacts from changes in foreign currency and a combined 30 basis points of negative impact from less favorable product and regional mix. These headwinds were partially offset by 320 basis points of supply chain benefits related to inbound ocean and air freight tailwinds and 20 basis points from a more favorable channel mix.

SG&A expenses were down 1.5 percent to $586.8 million and increased slightly as a percent of sales to 44.6 percent from 44.2 percent.

Operating income fell 39.3 percent to $20.9 million from $34.5 million a year ago.

Net income improved 11.2 percent to $8.5 million, 2 cents a share, from $7.7 million, or 2 cents, a year ago. Results were in line with the analyst’s consensus target of 2 cents.

Inventory was up 38 percent year-over-year at the quarter’s end, improving from being up 44 percent on the same basis at the close of the fiscal fourth quarter. Bergman said inventory levels were in line with the brand’s outlook, noting that the company employed leaner inventory levels through the summer of 2022 due to a constraint model to stimulate demand as well as proactive cancellations of orders due to COVID-related supply challenges.

Strategic Growth Program Progress
In her second quarterly conference call with analysts, Linnartz largely updated analysts on progress under its PTH3 program announced in May which includes:

  • Driving global brand heat with an emphasis on the U.S.;
  • Delivering elevated design and products with a focus on footwear, sports style and women; and
  • Driving U.S. sales

“Although these initiatives will take time to gain traction with one quarter behind us, I am pleased by the team’s increased execution, accountability and unification around these pillars,” said Linnartz. “Using fiscal ’24 as a building year to focus on cost management and profitability, we are making progress across each of the PTH 3 priorities.”

Driving Global Brand Heat
Around driving brand heat, Linnartz pointed to the hiring of Jim Dausch as chief consumer officer, and Amanda Miller as chief communications officer. Linnartz worked alongside Dausch for 20 years at Marriott International while Miller comes from Paypal.

Linnartz called Dausch  “a seasoned executive with experience leading transformational strategic initiatives across product, marketing and sales and driving significant brand and consumer loyalty improvement.” He will be charged with “linking all of our commercial elements together.” Miller, according to Linnartz, will be tasked with “evolving how we tell our brand and product story to our athletes, consumers, the media and other stakeholders.”

Linnartz said a search for a chief product officer and chief supply chain officer is underway following the exits last month of Lisa Collier and Colin Browne, respectively.

In marketing, Under Armour saw “positive results” with the return of its “Protect This House” campaign earlier this year and continued the campaign around the Women’s World Cup with installations featuring Kelley O’Hara from the U.S. team and Alex Greenwood from England’s team. The effort supported the women’s UA Magnetico Elite 3, the brand’s first cleat made with a specific last for a women’s foot.

Also supporting its women’s focus, Under Armour held a series of events coinciding with the WNBA All-Star weekend in July featuring the brand’s newest WNBA ambassador Diamond Miller, alongside Kelsey Plum with the Las Vegas Aces. Both hosted a youth basketball camp powered by UAE next, Under Armour’s youth-focused sports development camp.

Under Armour also recently held the eighth reiteration of “Future 50,” also supported by UAE Next and featuring 50 of the best high school football players gathered at the IMG Academy in Bradenton, FL. Ambassadors Justin Jefferson of the Vikings and Kyle Hamilton of the Ravens attended the event. Also in footwear, Under Armour extended its Notre Dame deal for another ten years.

Online, alterations being made to its social media approach to reach younger consumers have led to “increasingly positive results over the past 6 to 8 months,” said Linnartz. Category-specific social handles are being refined to better target athlete groups better and a bigger focus is being placed on connecting product marketing and technical attributes. Under Armour also continues to to improve the shopping experience for Under Armour products featured in posts on Instagram and TikTok “and working towards direct purchase and checkout on their platforms, another step in enhancing our omnichannel capabilities.”

Delivering Elevated Design And Products
Around product and design, Linnartz noted that Under Armour over the past three months has begun to simplify product lines around fewer collection groups to better engage and convert consumers. Linnartz said, “To enable this, we plan to distort investments towards a strategic handful of specific apparel and footwear collections that we will activate through improved inspirational storytelling to drive more consistent demand for key franchises.”

To help offset the apparel pressures at North American wholesale channels, Under Armour is launching a significant update to its original Heat Gear compression baselayer t-shirt as well as introducing an elevated take on the brand’s popular Meridian legging collection with improved materials in UA stores and Dick’s House of Sport locations. Linnartz said, “Both Heat Gear and Meridian will be priced to attack better and best level products, helping to advance one of our broader goals which is to drive higher ASPs (average selling prices) to leverage gross margin and P&L productivity better”

In footwear, UA will look to build on the momentum in the SlipSpeed platform with a number of training and running launches. The Curry 11 basketball shoe is set to launch in October. Linnartz said, “In addition, we are continuing to amplify the Curry brand platform more meaningfully with new footwear, apparel and accessories across basketball, golf and sports style in the works. This expansion will also unlock new distribution opportunities at our existing retail partners and provide better consideration into places that were not well represented.”

In its more lifestyle-oriented Sports Style business, fleece offerings will be amplified this fall via the brand’s Unstoppable and Essential fleece franchises. The fleece push will be highlighted in a back-to-school campaign featuring Justin Jefferson and be available in Under Armour’s DTC channels and premium wholesale locations.

Driving U.S. Sales
She said Under Armour in the U.S. is “focused on strengthening our retail partner relationships across our sports specialty business,” while looking to add doors at department stores and mall channels. Linnartz said, “We’re focused on determining where the best expansion opportunities exist across our wholesale and direct-to-consumer channels while at the same time, assessing ways to optimize SKU productivity with improved segmentation to drive meaningful ASP expansion as we grow our better-level products.”

Linnartz expects the door expansion to malls and department stores will take place in spring/summer 2024.

Under Armour’s DTC growth is expected to receive a boost from the launch of the brand’s first rewards program, UA Rewards, on July 31. Taking learnings from loyalty programs introduced in her past role at Marriot, the free program features early access to products, exclusive content, unique experiences and sweepstakes. She said the program is designed to drive higher revenue per customer, repeat business, and increase direct channel engagement. Linnartz said, “This is a fantastic step forward for us, and I am confident UA rewards will be an excellent asset in deepening connection with athletes and inspiring better sales conversion as we scale the program.”

Linnartz nonetheless stressed said U.S. sales growth will be largely driven by first two priorities of PTH3 of driving global brand heat and delivering better products. She observed, “As our most profitable region, we have to win in our home market of North America. Growing faster here means more future dollars to invest in product, marketing and our international business as well as increasing returns to shareholders.”

Outlook
Under Armour noted that there were no changes to its FY24 guidance given on May 6 except for slightly lower expectations for North America sales and slightly higher for international growth.

The guidance for the FY24

  • Revenue is expected to be flat to up slightly.
  • Gross margin is expected to be up 25 to 75 basis points compared to the prior year’s rate of 44.9 percent, driven by supply chain tailwinds related to lower freight costs, partially offset by mix impacts related to higher off-price revenue and higher promotions expected in the company’s direct-to-consumer business.
  • SG&A expenses are expected to be flat to up slightly.
  • Operating income is expected to reach $310 to $330 million (prior year, $304 million on an adjusted basis).
  • Diluted earnings per share is expected to be between $0.47 and $0.51. (Prior year, 58 cents on an adjusted basis)

For the second quarter, revenue is expected to be flat to down slightly versus the prior year including a low-single-digit decline in the North American business, partially offset by mid-single-digit international growth. The year’s highest revenue growth rate is expected to occur in its fourth quarter.

Gross margins are projected to be up approximately 100 to 150 basis points in the second quarter due to tailwinds from lower freight costs partially offset by persistent promotional activity. The third quarter is expected to have the year’s smallest quarterly gross margin improvement due to anticipated actions to manage inventories down further

Operating income in the second quarter is expected in the range of $115 million to $135 million which translates to 18 to 21 cents a share. That compares with adjusted operating income of $129 million and 20 cents a year ago.

In line with previous guidance, inventory is projected to be up at a mid- to high single-digit percentage rate at the end of the second quarter before declining in the third quarter and being down at a mid-teen percentage rate to end of FY24 at approximately $1 billion.

Photo courtesy UA x Kelly O’Hara