By Thomas J. Ryan

<span style="color: #9e9e9e;">UA reported a loss in the first quarter on a 22.8 percent drop in its sales while warning second-quarter revenues could slide as much as 50 percent to 60 percent as the COVID-19 fallout worsens. Measures were detailed to reduce 2020 operating expenses by $325 million and capital expenditures to $100 million.

In early-afternoon trading on Monday, shares of Under Armour were at $7.97, down 97 cents a share.

“During the first quarter, our results in January and February were tracking well to our plan,” said Under Armour President and CEO Patrik Frisk. “Since mid-March, as the pandemic accelerated dramatically in North America and EMEA and retail store closures ensued, we’ve experienced a significant decline in revenue across all markets.”

Frisk continued, “As a result, like so many businesses, we’ve had to make very difficult decisions, including temporarily laying off teammates in our U.S. retail stores and distribution centers along with other actions to ensure we protect Under Armour’s financial stability.”

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In the quarter ended March 31, sales reached $930.2 million, down from $1.2 billion a year ago. Sales were down 22 percent on a currency-neutral basis. Of the 22 percent decline, 15 percentage points are related to COVID-19 pandemic impacts.

On its February 11th Q4 earnings call, Under Armour officials had forecast revenues would be down 13 to 15 percent with about five points of the decline attributable to the China-only COVID-19 impacts, about five points due to significantly lower sales to the off price channel, and about three points to the service level improvements that allowed the company to deliver more products in the fourth quarter of last year. Sales to the off price channel were lower than originally anticipated but the impact of COVID-19 was significantly worse.

North America’s revenue decreased 27.8 percent to $609 million, and revenue from its international business decreased 12 percent to $287 million (down 11 percent currency-neutral), representing 31 percent of total revenue.

Within the international business, revenue increased 2.8 percent (up 4 percent currency-neutral) in the EMEA region, to $137.9 million. In the Asia-Pacific region, sales slumped 33.7 percent (down 32 percent currency-neutral) to $95.7 million. In the Latin America region, sales increased 7.9 percent (up 11 percent currency-neutral) to $53.1 million.

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<span style="color: #9e9e9e;">On a conference call with analysts, Frisk said both owned and partner doors began closing in China in late January and remained largely closed until early March. A slow progressive reopening process began at the end of March and now more than 80 percent of locations in China reopened by the end of March and all are open currently. However, traffic, while recovering steadily in recent weeks, continues to be down year-over-year. Business results and trends in South Korea have been similar to those in China, while retail and partner locations outside of those countries in the Asia-Pacific region have remained predominantly closed since the end of the first quarter.

Beginning mid-March, the company temporarily closed all owned doors across the North America, EMEA and Latin America regions. In addition to these locations, the vast majority of wholesale customer stores, where its products are sold, also closed beginning mid-March. Frisk said that substantially all of its owned doors, and those of its retail partners, remain closed in these regions, and the pace and timing of store openings and traffic patterns when the stores re-open remain highly uncertain.

Wholesale revenue revenue in the quarter decreased 28 percent to $592 million with the decline primarily stemming from the North American business. Direct-to-consumer (DTC) revenue slid 14 percent to $284 million, representing 31 percent of total revenue. One bright spot has been e-commerce, which has been seeing accelerated growth in North America and EMEA since the beginning of the second quarter with particular strength in its women’s business. Said Frisk, “Although only a low-double-digit percentage of global revenue, we’re encouraged by the emerging strength of our e-commerce business.”

Apparel revenue decreased 22.8 percent to $598.3 million. Footwear revenue decreased 28.3 percent to $209.7 million. Accessories revenue decreased 17.4 percent to $67.7 million.

Gross margin increased 110 basis points to 46.3 percent driven primarily by channel mix which benefitted from lower off-price sales, partially offset by the negative impacts from COVID-19 related discounting and changes in foreign currency.

SG&A expenses increased 8 percent to $553 million driven primarily by increased legal expenses and amplified marketing related activities. As a percent of sales, SG&A expenses expanded to 59.4 percent from 42.3 percent.

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Restructuring and impairment charges in the latest quarter were $436 million, consisting of $301 million in restructuring and related impairment charges ($298 million in non-cash and $3 million in cash related charges) and $135 million from impairments of long-lived assets and goodwill.

On April 3, Under Armour unveiled its 2020 restructuring plan that included pre-tax restructuring and related charges in the range of $475 million to $525 million during 2020, including up to approximately $350 million of non-cash charges and $175 million of cash-related restructuring charges. The charges primarily related to its decision to forego opening its New York City flagship.

The operating loss in the latest quarter came to $558 million against operating earnings of $35.2 million. Excluding the impact of the restructuring plan and impairments, the adjusted operating loss was $122 million.

The net loss came to $589.7 million, or $1.30 a share, against earnings of $22.5 million, or 5 cents, a year ago. On an adjusted basis, the net loss in the current quarter came to 34 cents a share, short of Wall Street’s consensus target calling for a loss of 17 cents.

Inventory at the quarter’s end was up 7 percent to $940 million. In anticipation of significant changes in future demand, Under Armour is reducing planned inventory receipts and has been negotiating extended payment terms with both its customers and vendors.

Under Armour plans to reduce its originally planned 2020 operating expenses by approximately $325 million through various initiatives, including:

  • Taking actions to limit broader marketing activations until greater visibility is available into the magnitude of the virus’ impact on consumer demand and behavior;
  • Reducing incentive compensation;
  • Temporarily laying off employees that worked in its own retail stores and U.S.-based distribution centers;
  • Tightening its hiring, contract services, travel and other discretionary and variable costs;
  • Postponing planned capital expenditures contributing to reduced depreciation; and
  • Realizing the operating expense benefits included within the approximate $40 million to $60 million of expected pre-tax savings in 2020 from its restructuring plan.

UA ended the first quarter with cash and cash equivalents of $959 million, of which approximately $600 million was related to borrowings under its revolving credit facility. The company currently has $700 million outstanding under this facility. On May 12, Under Armour is expects to close an amendment of its credit agreement that will improve access to liquidity.

Under Armour further expects to reduce its planned capital expenditures to approximately $100 million compared with its previous expectation of approximately $160 million in 2020. Original investments are generally expected to continue as business conditions stabilize.

The company withdrew its outlook on April 1 and indicated it still can’t provide guidance given the uncertainty in the marketplace.

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<span style="color: #9e9e9e;">A silver lining from the pandemic’s challenge has been Connected Fitness, which saw revenues grow 8.9 percent in the quarter, driven by continued subscription momentum. Frisk said that since mid-March, the record for the number of MapMyRun workouts for a single day has been broken six times and new users are up 275 percent as many Americans under lockdown have rediscovered or accelerated their running efforts. The momentum has also continued to grow in Under Armour’s Connected Footwear business with year-over-year-workouts up over 200 percent since mid-March.

Said Frisk, “This is a unique time to sharpen our digital knowledge by converting real-time data and analytics to drive brand interest and consideration within our largest categories of training and running. From dedicated and casual runners whose habit has picked up significantly due to gym closures, to devoted fitness and team sport athletes who are craving opportunities to stay active while their normal routine have been halted, our engagement strategies are driving momentum into our digital channels. All positive factors that we believe are helping directly contribute to the improvement in e-commerce sales that we’ve seen since the end of March. And although this is still a fairly small part of our business, this validate some of the pre-COVID work coming together with recent strategic adjustments to drive brand consideration.”

Frisk also believes the brand will benefit from a greater focus on health due to the crisis. The CEO said, “As the world continues to persevere through these challenging times, health, fitness and wellness are even more center stage. In fact, the balance between physical and emotional well-being, and the visceral connection to our capacity to fight, drive and restore in these extraordinary circumstances, draws directly on strengths from these very elements. So while many things are on lockdown, inspiration, wellness and fitness are most certainly not quarantined.”

Frisk also highlighted Under Armour’s efforts to assist in the pandemic. The brand is on track to produce and provide nearly 5 million face masks and 200,000 gowns to Johns Hopkins, and nearly 40 other healthcare organizations. Performance product has also been donated to numerous health care professionals in certain hard-hit regions around the world. Logistics expertise from Under Armour’s team and distribution center space have been provided to organizations that need to quickly scale the storing and distribution of PPE and medical supplies. Support for the Feeding America and local food banks in Baltimore have also been part of the effort.

For the second quarter, David Bergman, CFO, said that with approximately 80 percent of its global business having been closed since April 1, the company currently anticipates that revenue could be down as much as 50 to 60 percent in the second quarter. Bergman said, “Although we do anticipate that our business will gradually reopen in the coming weeks and months, we believe there will be a number of challenges ahead of us and the greater global retail space, including a slow and progressive return in normalization, a highly promotional environment, and significant uncertainty in brick and mortar traffic and conversion as consumers return to stores.”

Frisk concluded, “As we continue to navigate this crisis, our balance sheet remains well managed, and our leadership team is taking decisive actions to execute against our continued transformation. We remain focused on driving greater efficiencies across the core elements of our business by working to identify additional opportunities to emerge with stronger and greater capabilities over the long-term.”

Photo courtesy Under Armour