Boosted by a better-than-expected performance in North America and continued momentum at direct-to-consumer (DTC), Under Armour reported third-quarter earnings arrived well above Wall Street’s target and significantly hiked earnings targets for the year. Officials said the company is on track to deliver record revenue and earnings results in 2021.
Shares of Under Armour were up about 14 percent in mid-day trading on Tuesday.
In the quarter ended September 30, revenues rose 7.9 percent to $1.54 billion, topping Wall Street’s consensus target of $1.48 billion. Gross margins were up 310 basis points to a record 51 percent.
Net earnings reached $113.4 million, or 24 cents a share, against $38.9 million, or 9 cents, a year ago. Excluding charges related to its restructuring program and a loss on extinguishment of debt, adjusted EPS was 31 cents, doubling Wall Street’s consensus target of 15 cents.
North America Q3 Sales Climb 8 Percent
The outperformance reflected accelerated momentum in the North America region, where sales grew 7.6 percent to $1.04 billion.
Under Armour President and CEO, Patrik Frisk said the North America performance was “indicative of improving brand health in our largest market. We had stronger than expected back to school and direct to consumer demand. In fact, North America drove the majority of the third quarter over-delivery for the company.”
Compared to 2019, North America’s revenue was up 2 percent in the third quarter.
Frisk pointed to some fundamental differences in the North America market versus 2019 that supported healthier profitability in the region. The differences include a significant increase in its DTC business over the last two years, substantially lower sales to off-price retailers, reduced promotional and markdown activities, proactive supply constraints, and moves to exit undifferentiated wholesale accounts.
Frisk said, “All in, meaningfully higher quality and more productive dollars going through our P&L now than just two years ago.”
Operating profits in the North America region improved 30.2 percent to $292.4 million, or 28.2 percent, from $224.6 million, or 23.3 percent, a year ago.
Asia Pacific Paces International Growth
In the Asia Pacific (APAC) region, sales were up 18.5 percent to $212 million, driven primarily by wholesale growth. Said Frisk, “Given some of the recent market trends, particularly in China where traffic continues to struggle, our consumer insights data tells us that our brand health is holding steady in an otherwise dynamic environment. We attributed this to the investments we’re making into marketing, CRM and store expansions, including opening our 1000th store in the region.”
Versus 2019, APAC revenue was up 37 percent.
EMEA sales grew 14.8 percent to $241.2 million, driven by wholesale and benefiting from continued momentum from distributor partnerships and a solid DTC performance. Versus 2019, EMEA revenue was up 50 percent. Said Frisk, “In our two most prominent countries in this region, the U.K. and Germany, we remain focused on brand development, building long-term relationships with our key wholesale partners, and strengthening our direct-to-consumer team and retail capabilities. EMEA wholesale growth was balanced across our full price and distributor businesses.”
Latin America region revenues were up 27.2 percent to $56.4 million, driven by strength in the brand’s full-price wholesale and distributor businesses. Compared to the third quarter of 2019, revenue increased 8 percent. Growth is expected to be pressured in the fourth quarter as Under Armour transitions certain countries to a strategic distributor model.
DTC Sales Climb 12 Percent, Wholesale Gains 10 Percent
By channel, direct-to-consumer sales in the quarter increased 12 percent to $604 million, led by 21 percent growth at its stores partially offset by a 4 percent decline in e-commerce, which faced a difficult comparison to the 2019 third quarter. Compared to 2019, e-commerce revenues jumped over 50 percent. Overall, DTC was up 31 percent on a two-year stack versus the 2019 third quarter.
Frisk said in-store traffic was “somewhat mixed” and reflected COVID restrictions worldwide, but continued improvements were seen in average selling prices and productivity due to higher-than-expected demand. The reduction in promotions and higher-price sell-through in the DTC channel supported the overall gross margin improvement.
Frisk said, “Overall, we’re pleased that our strategies towards improved presentation and experiences in our stores and online are driving better economics throughout this business.”
Wholesale revenue climbed 10 percent to $911 million, driven by higher-than-expected demand in its full-price business in North American wholesale, which was tempered by a planned reduction in sales to the off-price channel as part of efforts to support its brand positioning.
Licensing revenue was up 24 percent to $32 million driven by improving strength within its North American partner businesses.
Apparel Sales Jump 14 Percent
By product type, apparel revenue was up 14 percent to $1.1 billion with strength across all categories, particularly in train and golf. Footwear was up 10 percent to $330 million, driven primarily by strength in running.
Accessories sales declined 13 percent to $126 million due to lower sales of sports masks.
In apparel, product successes during the quarter included the Iso-Chill that cools athletes, according to Frisk. Fleece sales strengthened in men’s and youth in anticipation of cooler months. Continued momentum was seen in UA’s men’s Unstoppable bottoms and women’s leggings, including those featuring its Meridian and No-Slip Waistband technology. The Project Rock collection in tops featuring Rush technology continued to land among the brand’s best sellers.
In footwear, core running products including Pursuit, Aurora and Assert strengthened in all regions globally. Project Rock footwear performed well and success was seen in slides. Regionally, highlights included the Curry Hover Splash and Mega Clone in APAC, Hover Street and Banda Trail in EMEA, and Men’s UA Flow Velociti and cleated footwear in the Americas, driven by better-than-expected back-to-school demand as team sports returned.
Frisk also said the decision to accelerate marketing spend made earlier this year is paying off in driving awareness, attraction and consideration with its target performance athlete customer. Said the CEO, “We use the team sports lens to focus on the importance of mental strength as an unlock to realize one’s full potential through uniquely Under Armor execution via social media, TV, retail and digital activations. The “Only Way Is Through. Train Your Mind. Train Your Game.” showed up as one global brand and voice across categories, channels and our marketing funnel.”
Gross Margins Boosted by Lower DTC Promotionality
The improvement of 310 basis points in gross margins was driven by 400 basis points of pricing improvements, due primarily to lower promotional activity within its DTC channel, along with lower promotions and markdowns within its wholesale business. Approximately 120 basis points of benefit due to channel mix primarily related to the lower mix of off-price sales.
Partially offsetting these improvements was about 100 basis points of negative impact related to the absence of my MyFitnessPal that was sold in November 2020 and 90 basis points of negative impacts from higher freight and logistics costs due to COVID-related supply chain pressures. Versus previous expectations, the higher-than-expected gross margin improvement was primarily due to lower-than-planned promotional activity within DTC and more favorable pricing related to sales to off-price retailers.
SG&A expenses were up 8 percent due to increased marketing investments, incentive compensation, and non-salaried workforce wages and were up slightly as a percent of sales, to 38.8 percent from 38.6 percent.
The quarter included $17 million of charges related to its 2020 restructuring plan designed to align overhead with lower sales expectations. The company announced it now plans to spend between $525 to $575 million on the plan, down from $550 million to $600 million when the plan was first announced in April 2020. It has recorded $500 million of pre-tax restructuring and related charges related to the plan so far, and the remaining charges will be taken by the first calendar quarter of 2022.
Operating income in the latest quarter came to $172.1 million against $58.6 million a year ago. Excluding restructuring and impairment charges, the adjusted operating income was $189 million, up from $133 million on an adjusted basis a year ago.
Inventory closed the quarter down 21 percent to $838 million, driven by improvements in its operating model and inbound shipping delays due to COVID-related supply chain pressures.
Record 2021 Earnings And Sales Now Expected
Looking ahead, revenue for 2021 is expected to be up approximately 25 percent compared to the previous expectation of a low-twenties percentage increase, reflecting a high-twenties percentage growth rate in North America and a mid-thirties percentage growth rate in the international business.
From a channel perspective, wholesale is expected to increase at a mid-30s rate and the DTC business up at a mid-20s rate with e-commerce up low-single-digits against 2020.
Gross margin is expected to increase approximately 130 basis points compared to the previous expectation of an approximately 50-to-70 basis point improvement versus the prior year adjusted gross margin of 48.6 percent. Expected benefits from pricing and changes in foreign currency are expected to be partially offset by the sale of the MyFitnessPal platform and expected higher freight expenses.
The improved gross margin guidance is primarily due to pricing benefits partially offset by increased freight expenses.
Full-year SG&A expense is now expected to be up 6 percent to 7 percent versus previous guidance calling for a high single-digit rate increase. The increase reflects incremental investments, particularly in marketing, to support demand. Higher incentive compensation is also projected against depressed year-ago levels.
Operating income is expected to reach approximately $425 million compared to the previous range of $215 million to $225 million. Excluding restructuring efforts, adjusted operating income is expected to reach approximately $475 million compared to the previous expectation of $340 million to $350 million.
EPS is expected to reach approximately 55 cents compared to the previous expectation 14 cents to 16 cents. Adjusted EPS is expected to reach 74 cents compared to the previously expected range of 50 to 52 cents.
Inventories are expected to end the year relatively flat against the 2020 year-end.
Supply Chain Disruption Seen Impacting 2022
David Bergman, CFO, Under Armour, expects a “relatively minimal” impact from the industry-wide supply chain pressures on 2021 results. Some changes in the timing of delivery have occurred, but no cancellations have impacted the fourth quarter.
Bergman nonetheless warned of “material impacts” for the first half of 2022.
For the first calendar quarter of 2022, revenue is projected to be up low-single digits. Bergman said Under Armour canceled some purchase orders for spring/ summer 2022 products to alleviate some pressure on factories.
Longer-term, Bergman noted that as of last week, nearly all factories that Under Armour contracts with, including those in Vietnam, are open. Full capacity will take some time to ramp back up. According to Bergman, with vaccination rates across Asia continuing to trend up, congestion and container availability at the origin ports have improved, but local ports of entry have become the more significant challenges.
Under Armor has already taken steps to minimize the supply chain disruption it expects will mitigate some supply chain pressures in 2022. These include moving to adjust orders and shipping with factory partners and logistics suppliers beginning in the second quarter, narrowing and editing its spring/summer 2022 order book with key wholesale accounts, and assessing various mitigation offsets for inflationary pressures, including elevated logistics and higher wages.
“Longer than usual transit times are expected over the next several quarters as backlogs and congestion find a balance, so this may create some variability in our results,” said Bergman. “That said, the proactive strategies we’re employing, greater operational agility, and overall demand for the Under Armour brand give us confidence in our ability to navigate effectively through the coming environment.”
Photo courtesy Under Armour
