Under Armour logged a steep second-quarter loss as the company ramped up the company’s restructuring efforts to further clean up the company’s inventories in the marketplace and reduce the company’s cost structure. The moves are designed to build a sounder foundation to support the company’s promised turnaround starting in 2019.
On February 13, Under Armour announced the company’s 2018 restructuring plan, which detailed expectations to incur total estimated pre-tax restructuring and related charges of approximately $110 million to $130 million. After further review, Under Armour on Thursday said the company has identified approximately $80 million of additional restructuring initiatives and now expects to incur approximately $190 million to $210 million of pre-tax restructuring and related charges in 2018. In the second quarter, pre-tax costs totaling $85 million consisting of $64 million in cash related charges and $21 million in non-cash charges were recognized. Based on the updated restructuring plan, in 2018 the company expects to incur:
- Up to $155 million in cash related charges, consisting of up to $75 million in facility and lease terminations and up to $80 million in contract termination and other restructuring charges and
- Up to $55 million in non-cash charges comprised of up to $20 million of inventory related charges and up to $35 million of asset related impairments.
On the brighter side, Under Armour’s second-quarter results before charges met Wall Street’s targets, sales came in slightly ahead of plan, including the first quarterly gain in North America in a year, and inventories were meaningfully improved.
“Today’s results demonstrate that we are tracking well against a multi-year transformation to build a stronger, leaner and more operationally excellent company, a company that is capable of supporting the incredibly strong global athletic performance brand that our team works tirelessly to cultivate, a brand that loves athletes, a brand that stays true, creates fearlessly and stands for quality, one that fights together, thinks beyond the obvious and is driven by a global team committed to the advancement of human performance,” said Kevin Plank, CEO, on a conference call with analysts.
He added, “The ongoing improvements in our structure, systems and go-to-market process across our global business better position us to drive a more consistent, predictable path to deliver for our consumers, customers and shareholders over the long-term. As we work through our multi-year transformation, we continue to proactively attack underperforming areas of our business, including our SG&A cost structure and inventory. All of this will help create a better and stronger Under Armour through even greater operational efficiencies.”
The net loss in the second quarter came to $95.5 million, or 21 cents a share, after restructuring and impairment charges totaling $79 million. That compares to a loss of $12.3 million, or 3 cents, in the same period a year ago. Excluding the impact of the restructuring plan, the adjusted net loss was $34 million, or 8 cents a share, in line with Wall Street’s consensus target.
Revenue was up 8 percent to $1.18 billion or up 7 percent on a currency-neutral basis. Sales were above Wall Street’s consensus expectations of $1.15 billion.
By region, revenue in North America was up 2 percent, or 1 percent currency neutral. This result was slightly better than Under Armour’s expectation due to additional inventory management actions and better-than-planned service levels.
In EMEA, revenue was up 25 percent on a currency-neutral basis with strong growth across the wholesale and direct-to-consumer (DTC) channels and particular strength in the U.K., Germany and Spain. Currency-neutral revenue in Asia Pacific was up 28 percent with strong balanced wholesale and DTC growth and continued strength in China, Korea and Australia. Revenue for Latin America was up 12 percent currency neutral.
By channel, wholesale business was up 9 percent on a currency-neutral basis to $710 million, driven primarily by inventory management initiatives, including increased sales through the off-price channel, as well as continued strength in the brand’s international business.
DTC revenue grew 7 percent to $414 million, driven by continued strong results in the company’s international and e-commerce businesses. DTC was 35 percent of total global revenue in the quarter. Licensing was down 16 percent to $21 million due to softer North American demand.
By product and segment type, apparel revenue increased 10 percent to $747 million, driven by training and running. Footwear increased 15 percent to $271 million, driven by running and team sports. Accessories decreased 14 percent to $106 million due to softer demand and actions to optimize distribution. Connected Fitness revenues were up 12 percent to $29 million, driven primarily by increases in subscription revenue.
Gross margin decreased approximately 110 basis points to 44.8 percent due to inventory management initiatives and a $6 million impact related to restructuring efforts. Adjusted gross margin decreased 60 basis points to 45.3 percent, driven predominantly by inventory management initiatives.
SG&A expenses increased 10 percent to $553 million, or 47.0 percent of revenue against 46.1 percent a year ago. The increase was driven by continued investments in DTC, footwear and international businesses, along with a reserve related to a commercial dispute.
On the call, Plank discussed the progress the brand is making against the company’s transformation efforts by looking at product, story, service and team.
Starting with product and story, he noted the UA HOVR Phantom and Sonic running shoes, Project Rock and Misty Copeland training collections and the Curry 5 basketball shoe all experienced strong sell-through “and are driving meaningful brand awareness, consideration and demand, supported by three comprehensive digital global campaigns were successfully rewriting our playbook with return-driven strategies.”
The success in these areas underscores Under Armour’s focus on performance and the company’s largest growth opportunities, especially running, training and basketball. He also said that for the second half, Under Armour will shift from a 21-month to a 16-month go-to-market calendar to lead to additional gains from SKU rationalization, supply chain wins and overall process efficiency.
At the same time, a significant ERP system upgrade with SAP completed last summer, segmentation efforts, inventory disciplines as well as the ongoing supply chain initiatives are supporting a “refined” go-to-market strategy. Said Plank, “This increased stability, improved planning acumen and enhanced capability enabled us to fine-tune and hone all aspects of our product cycle.”
On team, Planks cited the hiring of a “seasoned veteran and partner to spearhead this transformation” in regards to Patrik Frisk, who joined as president and COO a little more than a year ago.
“From category management to our go-to-market strategy and regional alignment, we’ve been changing the way we operate to become better,” said Plank. In the context of the transformation, Plank said Under Armour expects the second and third quarter bottom line being the most negatively impacted by the planned restructuring charges.
“We are proactively making these difficult decisions on behalf of the long-term best interest of the brand,” said Plank. “While transformation is never easy, our strategies are set and we are driving forward against our plan with our heads down producing and executing, and all the while keeping the strength of the Under Armour brand paramount in this ambition. We are resolute in our goal to architect the long-term operating and financial model, capable of driving sustainable, profitable growth and returns for our shareholders.”
On the call, Frisk noted that payback form the transformation was evident in the quarter with inventories only up 11 percent. The company had closed the year with inventories ahead 26 percent. Frisk said the inventory improvement “should demonstrate to you our commitment to setting ourselves up for a healthier marketplace in the second-half of 2018 and beyond. And that’s just it getting healthier, leaner and stronger. With our customers who want the most current assortment, improved service levels and turns, and with our consumers who demand newness, innovation and availability, or in some cases scarcity.”
He noted that increased inventory rationalization efforts will impact margins for the rest of the year but the goal is to see high single-digit inventory increase at the end of the third quarter and meet the company’s goal of being in the low single-digit rate by the end of the year.
“All in, this proactive inventory strategy combined with the supply chain initiatives that we’ve discussed on previous calls around tighter inventory buys, SKU materials optimization and vendor consolidation gets us closer to a full model and line of sight toward longer-term margin improvement opportunities,” said Frisk.
Frisk sad that with following the adoption of the new category management structure, new systems and the reengineered go-to-market process, the company has realigned regional structure with the appointments of Jason Archer as managing director of Asia Pacific, Manuel Ovalle as managing director of Latin America and Massimo Baratto as managing director of EMEA. Jason LaRose continues to lead North America.
Looking ahead, the updated guidance includes:
- Net revenue is now expected to increase approximately 3 percent to 4 percent reflecting a low-to-mid-single-digit decline in North America and international growth of greater than 25 percent. Previously, sales were expected to expand at a low single-digit percentage rate reflecting a mid-single-digit decline in North America and international growth of greater than 25 percent.
- From a product perspective, apparel is expected to grow at a mid-single digit rate, footwear at a low-single digit rate and accessories is expected to decline at a low-single digit rate.
- Gross margin is now expected to be flat to down slightly versus the prior year rate of 45.0 percent. Adjusted gross margin is now expected to improve slightly compared to 2017 as benefits from product costs and lower planned promotional activity are offset by increased inventory management actions. Previously, gross margin was expected to increase approximately 50 basis points due to benefits from lower planned promotional activity, product costs, channel mix and changes in foreign currency.
- An operating loss is now expected in the range of $50 million to $60 million. Under the previous forecast, Under Armour expected an operating profit of $20 million to $30 million.
- Excluding the impact of the restructuring plan, adjusted operating income is expected to be $130 million to $160 million, the same as former guidance.
- Excluding the impact of the restructuring efforts, adjusted EPS is expected to be in the range of 14 to 19, the same as its previous guidance.
- Capital expenditures are now planned at approximately $200 million, down from previous planned expenditures of approximately $225 million. In the prior year, capital expenditures were $275 million.
Under Armour also plans to hold an investor meeting at the company’s Baltimore headquarters on December 12.
Photo courtesy Under Armour