Shares of Under Armour were trading down about 25 percent in mid-day trading Friday after the company reported results for its transitional March quarter that slightly lagged Wall Street expectations and provided weak guidance for the current year as it battles supply chain disruption and COVID-related lockdowns in China.
“Having successfully executed a multi-year transformation after delivering the best year in Under Armour history in 2021, results for our transition period came in lighter than we had expected due to ongoing supply challenges and emergent COVID-19 impact on our Asia Pacific business,” said Patrik Frisk, president and CEO, on a call with analysts. “These trends, which we believe to be temporary, are also expected to impact how fiscal 23 is shaping up”
Frisk assured analysts that underlying demand for the brand remains strong with the firm having to cancel orders in the current quarter due to supply chain challenges. He said, “We feel good about growth going forward. And also we feel good about our ability to continue to grow our margins back again. So, this is a temporary state for this brand.”
For the current fiscal year ended March 31, 2023, sales are expected to increase 5 percent to 7 percent to a range of $6.01 billion to 6.13 billion, in line with Wall Street’s current consensus estimate of $6.07 billion. Adjusted EPS for the year is expected between 63 cents to 68 cents, below Wall Street’s current consensus estimate of 78 cents.
In February, Under Armour announced it was changing its fiscal year from December 31 to March 31.
In the transition quarter ended March 31, sales were up 3.4 percent (up 4 percent currency-neutral) to $1.3 billion, just short of Wall Street’s consensus estimate of $3.2 billion.
Dave Bergman, CFO, said Under Armour had forecasted sales to be up at a mid-single-digit rate. The forecast included an estimated 10 percentage points of revenue headwinds related to reductions in the Spring/Summer 2022 wholesale order book from supply constraints associated with ongoing pandemic impacts. Since providing the forecast, Under Armour’s APAC revenue has been affected by inbound shipping delays driven by pandemic disruptions. In addition, Under Armour encountered restricted store hours and store closures in China due to COVID-19, which caused significant reductions in retail traffic. Together, these challenges weighed on March quarter revenue by about 1.5 percentage points.
Wholesale revenues in the quarter increased 4 percent to $829 million, driven primarily by increases in its distributor and off-price businesses. The percent of sales to the off-price channel continues to remain low, at within 3-to-4 percent of revenues and is expected to remain at those levels for fiscal 23.
Direct-to-consumer (DTC) revenue increased 1 percent to $441 million, driven by 2 percent growth in e-commerce, which represented 45 percent of the total DTC business during the quarter. Owned and operated store revenue growth was flat during the quarter. Licensing revenue was up 23 percent to $26.6 million, driven by a timing shift in APAC and solid growth in North America.
By region, North America revenue increased 4.4 percent to $841 million, including growth in both wholesale and DTC.
International revenue increased 1 percent to $456 million (up 3 percent currency-neutral). Within the international business, revenue increased 17.6 percent in EMEA (up 22 percent currency-neutral) to $228.1 million, driven by growth in wholesale and DT. In the Asia-Pacific, sales decreased 13.5 percent (down 13 percent currency-neutral) to $181.9 million due to COVID-related inbound shipping delays, and challenging market conditions amplified by retail store closures and restrictions in China. In Latin America, sales were down 5.5 percent to $45.6 million due to shifts in the business towards a distributor model, which was completed in the third quarter of fiscal 2021.
By category, apparel revenue in the quarter increased 8.2 percent to $877 million due to strength in train and team sports categories. Footwear revenue decreased 4.0 percent to $297 million primarily due to COVID-related supply constraints. Accessories revenue decreased 17.5 percent to $97 million due to expected lower sales of sports masks.
Gross margins fell 350 basis points to 46.5 percent. The decline was largely due to elevated freight costs, particularly for ocean freight, which came in considerably higher than expected, along with increased air freight utilization. Increased off-price and distributor sales also weighed on margins. These headwinds were partially offset by 120 basis points of pricing improvements due to better pricing of sales to the off-price channel and lower promotional activity within its DTC channel.
SG&A expenses increased 16 percent to $594 million, increasing to 45.7 percent of sales from 40.9 percent. The higher expenses related to increased marketing investments, higher salaried and non-salaried workforce wages due to last year’s compensation increases, and higher consulting services
Restructuring and impairment charges were $57 million in the latest period against $7.1 million in the year-ago period. Under Armour announced that it had concluded its 2020 restructuring plan during the latest quarter. Under the $600 million plan authorization, $571 million of total charges were recognized, including $197 million of cash-related charges and $374 million of non-cash-related charges.
The operating loss in the latest quarter was $46 million against operating earnings of $106.9 million. On an adjusted basis, operating income was $11 million, down from $114 million a year ago. Operating income was below Under Armour’s outlook due to lower-than-planned APAC revenue and higher freight costs.
The net loss in the period came to $60 million, or 13 cents a share, against earnings of $78 million, or 17 cents, a year ago. On an adjusted basis that excludes items tied to its 2020 restructuring program, the adjusted net loss was $3 million, or 1 cent a share, missing Wall Street’s consensus target of 4 cents. In the year-ago period, adjusted net income was $75 million, or 16 cents per share.
Inventory at the quarter’s end was inventory was down 3 percent, driven primarily by inbound shipping delays due to COVID-related supply chain pressures.
Under Armour’s outlook for its fiscal year ended March 2023 includes:
- Revenue is expected to increase 5 percent to 7 percent versus the comparable baseline period of $5.7 billion, reflecting a mid-single-digit growth rate in North America and a low-teens growth rate in the international business. This expectation includes approximately three percentage points of headwinds related to its decision to work with vendors and customers to cancel orders affected by capacity issues, supply chain delays, and emergent COVID-19 impacts in China.
- Gross margin is expected to be down 150-to-200 basis points compared to the baseline period’s adjusted gross margin of 49.6 percent due to expected inflationary pressures on freight and product costs, unfavorable channel mix, and changes in foreign currency.
- Operating income is expected to reach $375 million to $400 million versus the comparable baseline period adjusted operating income of $424 million.
- Diluted EPS is expected to be between 79 cents and 84 cents versus the comparable baseline period of 47 cents. This includes a 28 cents benefit related to a tax valuation allowance release expected to be realized in the fourth quarter. Of this 28-cents benefit, 16 cents is related to prior restructuring charges. On an adjusted basis, EPS is expected in the range of 63 cents to 68 cents compared to the adjusted baseline period of 68 cents.
Bergman said Under Armour expects the first half of fiscal 2023 to be the most heavily impacted by order cancellations and supply chain delays. Current COVID-19 impacts in China are also to lessen as the year progresses to also support gradually improved sales growth as the year develops with the highest year-over-year gains expected in the fourth quarter.
The most significant declines in gross margin are expected to be in the second quarter as elevated freight costs, particularly for ocean shipments, peak against year-over-year comparisons. A smaller decline is expected in the third quarter with improvement seen in the fourth.
For the current first quarter, sales are expected to be flat to down slightly versus the prior-year quarter, including about 10 percentage points of headwinds from proactive reductions and cancellations to orders due to COVID-19-related supply constraints. Due to higher freight costs, gross margins are expected to be down approximately 250 basis points compared to the prior year. Operating income is expected in the range of $25 million to $35 million (versus $124 million on an adjusted basis a year ago) and EPS to range between 2 to 3 cents (versus adjusted year-ago EPS of 24 cents.)
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