Shares of Under Armour fell $1.88, or 10.4 percent, to $16.23 Tuesday after the company reduced its annual sales and earnings forecast while announcing a restructuring plan that includes the layoff of 277 employees.
And while second-quarter results came in better than Wall Street expected, the period showed a surprise decline in footwear, a category expected to play a significant role in helping the company reach its ambitious growth target of $10 billion by 2020. In 2016, sales reached $4.8 billion.
On Tuesday, Under Armour said it now anticipates revenues to rise 9 percent to 11 percent this year, down from previous expectations of 11 to 12 percent growth. It attributed the adjustment to a “moderation” in business in U.S. and Canada.
The company further now expects operating income this year before the charges for its restructuring effort to come in between $280 million to $300 million, down from its prior forecast of $320 million.
Shares were already trading well down from the $25.17 it started the year at as well as its 52-week high of $42.94. Like others, Under Armour has been ravaged by the exit of The Sports Authority and others in the sporting goods space over the last year. But it’s also facing stiff competition from Nike, a turnaround from Adidas and Dick’s SG launching its own compression apparel brand in addition to an overall challenging retail environment.
“We enjoyed hyper-growth for several years and I want to be clear we still believe we’re a growth company,” said Kevin Plank, CEO on a conference call with analysts. He called the restructuring program a “demonstrative sign that we’re not standing still, but acting quickly to evolve Under Armour to become a stronger, faster and smarter company.”
He added, “Some of the growing pains that we feel, while difficult, are the ones we believe necessary in securing the infrastructure, systems, processes, leadership and discipline to realize the full strength and potential of the Under Armour brand. Reinforcing and building the Under Armour brand remains a vision for our company, and we’re in this fight. We’ve got a couple of competitors in front of us, there’s a number behind us, and you’ll see us continue to separate ourselves as we move forward in building the brand that we believe is the brand of the future.”
Under the restructuring plan, the company expects to incur total estimated pre-tax restructuring and related charges of approximately $110 million to $130 million in fiscal 2017. The charges include up to $70 million in cash related charges, consisting of up to $25 million in facility and lease terminations, up to $15 million in employee severance and benefits costs, and up to $30 million in contract termination and other restructuring charges. The program also includes up to $60 million in non-cash charges comprised of approximately $20 million of inventory related charges and approximately $40 million of intangibles and other asset-related impairments.
Plank said the changes are meant to make Under Armour more efficient across the board, with better “go-to-market speed” and improved “digital capabilities.”
“Having grown so quickly over the last three years, we developed certain muscle groups really well while underserving others,” Plank said.
The 277 jobs represent about 2 percent of Under Armour’s workforce. About half will come from the company’s headquarters in Baltimore. The company had about 15,200 employees as of December 31, according to a regulatory filing.
Much of the restructuring will likely be overseen by Patrik Frisk, who was appointed president and COO in July. In brief comments on the call, Frisk, who previously ran Timberland, said, “I’m learning as much as possible about our brand, our consumers, our customers and the opportunities before us, opportunities that capitalize on our strengths: product innovation, connection with our consumers and customers and our largest growth opportunities including our direct-to consumer, our international, our footwear, women’s and lifestyle businesses. And opportunities to improve efficiency and effectiveness: our speed to market, operational processes and digital capabilities. Putting all of this into better balance will undoubtedly strengthen our ability to execute against our long-term growth strategy and create value for our shareholders.”
In the second quarter, sales rose 8.7 percent to $1.1 billion and grew 8 percent on a currency-neutral basis. Sales exceeded Wall Street’s consensus target of $1.08 billion.
Under Armour said sales were slightly stronger than its internal outlook due to timing shifts associated with upgrading its enterprise resource planning system. Under Armour went live in early July with SAP’s FMS or Fashion Management Solution, and management is pleased with the progress so far.
Gross margin declined 190 basis points to 45.8 percent. Margins were hurt by continued inventory management efforts, changes in foreign currency rates as well as higher air freight in connection with its enterprise resource planning (ERP) system implementation, which impacted the timing of shipments to certain key customers. Those headwinds were only partially offset by channel and product mix, which included a lower composition of liquidations.
SG&A expenses increased 10 percent to $503 million and was up 40 basis points as a percent of sales, to 46.2 percent. The increase reflected continued investments in the direct-to-consumer, footwear and international businesses. The increase was better than planned due in part to expense management efforts and some timing shifts and demand creation and other expenses.
Under Armour showed an operating loss was $4.8 million, down from operating earnings of $19.4 million. Including other interest and expense, the net loss was $12.3 million, or 3 cents a share, exceeding Wall Street’s average target calling for a 7 cents a share loss in the period.
In the year-ago quarter, Under Armour showed a net loss of $52.7 million, or 12 cents a share, due to charges related to last year’s creation of a new Class C non-voting common stock. Excluding those charges, year-ago net income was $6.3 million, or 15 cents a share.
By category, sales of apparel rose 11.1 percent to $680.7 million, driven by strength in men’s training, women’s training and golf. Said David Bergman, CFO, on the call, “Our premium innovation platforms led by Threadborne, combined with our focus on improved assortments and newness continue to resonate with our consumers around the world.”
Footwear sales were down 2.4 percent to $236.9 million. The category was challenged by a 58 percent surge in the second quarter of last year, which benefited from significant strength in basketball sales. Additionally, efforts to manage inventory appropriate to the North American marketplace negatively impacted the footwear category in the quarter.
Accessory sales climbed 21.7 percent to $122.6 million with solid results from men’s training, women’s training and youth performance.
Revenue to wholesale customers rose 3 percent to $655 million as strength in international offset an “uneven” North American business, said Bergman.
Direct-to-consumer (DTC) revenue was up 20 percent to $386 million with growth in all three concepts; factory, brand house and e-commerce and in each region around the world. As a percent of total, DTC was 35 percent of global revenue in the quarter. Licensing sales grew 19.5 percent to $25.1 million, driven primarily by strength in its sock business.
By region, North America’s sales inched up 0.3 percent to $829.8 million. The region posted a loss of $5.42 million against operating earnings of $28.1 million in the same period a year ago. Said Bergman, “The dynamic and promotional retail environment in North America tempered results to be in line with last year’s same period. As previously noted, we are proactively managing our inventory levels in our largest market, while continuing to protect brand health as we navigate the uneven consumer landscape.”
Outside North America, international revenues jumped 57 percent to $235 million, representing 22 percent of total revenue in the quarter. Currency neutral revenue was up 54 percent.
The EMEA region widened its loss to $4.6 million from $2.96 million a year ago. Sales jumped 57.0 percent to $103.9 million. The sales gains were driven by balanced growth across wholesale and DTC. Said Bergman, “We continue to drive strong momentum in our key markets, the U.K. and Germany, while also expanding our presence through newer markets for the brand, including Italy.”
In the Asia-Pacific region, operating profits reached $15.2 million, up 53.8 percent. Sales climbed 88.8 percent to $93.6 million. The increases were driven by strength in China, Taiwan and Korea as the brand continued to resonate with consumers across key categories like run and basketball.
In the Latin America region, the operating loss was $8.09 million, slightly down from $8.2 million a year ago. Sales were $38 million, up 10.4 percent, led by strong growth in its DTC channel.
The Connected Fitness unit lowered its operating loss to $1.9 million from $7.5 million a year ago. Connected Fitness sales were $22.97 million, down 2.2 percent.
Inventory was up 8 percent to $1.2 billion, closely in line with its revenue growth. Accounts receivable was up 31 percent due to timing of shipments.
Despite its struggles, Plank on the call said the brand has upcoming product launches with “outstanding potential in the second half” of 2017. These include Cam Newton’s new training shoe, the “Icon” customized footwear program and the fall release of the “Curry 4,” the latest edition of Golden State Warriors star Stephen Curry’s basketball shoe. But he largely termed 2017 as a transition year.
“We’re using 2017, frankly, as an opportunity to position ourselves for the long term. It’s the only way for us to think about our business right now,” Plank said.
His overall message was investing to get “stronger, faster and smarter.”
Plank added, “The landscape is evolving quickly. Therefore, we too must evolve quickly.” He said the company had to “pivot” faster in a number of ways to address the changing environment, including pivoting from “a product company to a consumer-led and category-managed brand,” from one fixated on men’s offerings to those addressing women and kids as well, as well as shifting from an apparel-centric manufacturer to one equaling specializing in footwear and accessories. He also cited a need to become better balanced with direct-to-consumer sales versus wholesale as well as more focused on profitability and operational efficiencies and less on its sales-first approach of the past.
Said Plank, “Once balanced, these pivots will work together to build a more efficient, thus more effective Under Armour.”
Looking ahead, net revenues expected to grow 9 to 11 percent versus the previous expectation of 11 to 12 percent growth, reflecting moderation in the company’s North American business.
Gross margin, on a reported basis, is expected to be down approximately 160 basis points compared to 46.4 percent in 2016 as benefits from product costs and sales mix are offset by impacts from the restructuring plan, changes in foreign currency and increased efforts to manage inventory. Excluding the impact of the restructuring, adjusted gross margin is expected to be down at least 120 basis points compared to 46.4 percent in 2016. Previously, Under Armour had only forecast that gross margins would be slightly down.
On a reported basis, operating income is expected to reach approximately $160 million to 180 million. Excluding the impact of the restructuring plan, adjusted operating income is expected to be approximately $280 million to $300 million. Previously, operating income was expected to reach approximately $320 million.
On a reported basis, full year EPS is expected to be 18 to 21 cents a share. Excluding the impact of the restructuring plan, EPS is expected to reach 37 to 40 cents. Previously, the company did not provide a projection for EPS. Wall Street’s average estimate had been 42 cents.
The company does see a bounce back in top-line growth in the fourth quarter.
For the third quarter, revenues are projected to be essentially flat against last year same period, given the strong year-ago comparison. In the fourth quarter, revenues are expected to be up at a low to mid 20s percentage rate.
The imbalance between Q3 and Q4 is due to several factors, according to Bergman. From a distribution perspective, new North American distribution is expected to extend the company’s ability to reach a segment of consumers not previously serviced. Internationally, Under Armour has expanded distribution of both wholesale and DTC, and it’s seeing strong sell through in comps.
“From a product perspective, we believe new launches, improvements in our assortments and segmentation position us competitively going into this holiday season,” said Bergman.
From a channel perspective, the fourth quarter is its largest DTC quarter and is expected to deliver measured growth.
“Within marketing our focus and approach is sharper and our frequency is increasing,” added Bergman. “Undoubtedly more spend, more presence, and a stronger more consistent brand voice will be heard from us in the second half. And finally, we’re up against our lowest quarterly comparison from 2016 in this year’s fourth quarter.”
Photo courtesy Under Armour
