At its Investor Day Wednesday in Baltimore, Under Armour officials touted early paybacks in its Transformation efforts and the brand’s ability to tap into a Focused Performer consumer that globally commands $92 billion in revenue potential. But shares of Under Armour fell sharply on the day as Under Armour forecast only modest growth in the years ahead, including little pickup in North America.
For 2019, sales are expected to expand 3 to 4 percent as gains overseas offset flat sales in North America.
Shares of Under Armour fell $2.32, or 10.5 percent, to $19.80.
Global revenue is expected to return to a low double-digit growth rate in 2023, but overall Under Armour expects to show a mid to high single-digit five-year compounded annual growth rate (CAGR) from through 2023.
Growth is expected to end up being up low to mid-single digits on average during the 2017 to 2019 ”Protect This House” phase, then improve to mid-to-high single digit growth as Under Armour moves into its “Perform With Balance” stage over 2020 to 2022 before accelerating to double-digit growth in 2023.
The gains are expected to be driven primarily by the company’s International and Direct-to-Consumer businesses.
Among its three segments, the fastest growth is expected to come from International, with a five-year CAGR of 17 to 19 percent; followed by Connected Fitness, 8 to 10 percent; and North America, 1 to 3 percent. International is expected to expand to 42 percent of sales by 2023, up from 25 percent in 2018. North America is expected to be reduced to 56 percent of sales by 2023, down from 73 percent in 2018. Connected Fitness is only expected to account for 2 percent of revenues in 2018 and is projected to remain around 2 percent in 2023.
By channel, the fastest growth is expected to come from DTC Digital, with a five-year CAGR of 12 to 14 percent. DTC retail is expected to expand at a 6 to 8 percent five-year CAGR and Wholesale at a 5 to 7 percent five-year CAGR. As a result, DTC Digital is expected to grow to 16 percent of Under Armour’s sales by 2023, up from 12 percent in 2018. DTC Retail is expected to remain at 23 percent. Wholesale is expected to ease to 57 percent of sales by 2023 from 60 percent in 2018. Licensing/Connected Fitness revenues are expected to dip slightly, to 4 percent from 5 percent.
By product type, the strongest growth is expected in Footwear, with a 12 percent five-year CAGR globally through 2023. Apparel and Accessories are both expected to expand at a 5 to 7 percent five-year CAGR. As a result, Footwear is expected to expand to 25 percent of revenues by 2013 from 22 percent in 2018, Apparel is projected to shrink to 67 percent from 70 percent. Accessories is expected to remain at 8 percent.
Gross margin is expected to increase 275 to 300 basis points over the next five years, reaching at least 48.0 percent in 2023. Higher growth in the comparatively lower-margin footwear category and higher labor and law materials costs is expected to be offset by growth in DTC and the APAC region, efforts in the supply chain to optimize sourcing costs and the benefit from SKU reduction, and price optimization efforts.
Restructuring efforts are expected to amount to $350 million over 2017 and 2018 with expected average annual savings over 2019 to 2023 in the amount of $200 million. Of the annual $200 million in savings, $50 million will be reinvested in marketing and $75 million in other SG&A with $75 million contributing to SG&A leverage.
SG&A is expected to be reduced 400 to 450 basis points to a target of 38 percent of sales by 2023. Savings in headcount, depreciation and other SG&A is expected to offset investments in its 5th Avenue flagship and international third-party logistics.
Annual operating margin is expected to reach a low double-digit percentage rate by 2023, improving 560 to 700 basis points.
In North America, Under Armour sees a $29 billion opportunity addressable market to address the brand’s “Focused Performer” target, a group of young, diverse and active consumers.
Growth-wise, however, Under Armour only expects to end up with a flat to low single digit CAGR in the region over 2017 to 2019, low-single CAGR from 2020 to 2022 and low-single digit gains in 2023. Operating income, however, is expected to improve from 2.2 percent of sales in the region in 2017 to a mid-single digit rate by 2023.
In the region, officials see an opportunity to grow its footwear and women’s businesses, expand DTC, and further explore the lifestyle opportunity.
Growth in the region is being impacted by a contraction in the sporting goods sector as well as growth in e-commerce pure-plays. The focus is expected to to be to stabilize and right-size inventory, define clear points of differentiation and focus on premium distribution, including strategic wholesale accounts and DTC.
By channel, wholesale sales growth in the North America region is expected to be flat to up 2 percent over the next five years on a CAGR basis. DTC Retail and DTC Digital are both expected to each expand 3 to 5 percent on a five-year CAGR. Wholesale is expected to decline to 55 percent of sales from 60 percent; DTC Retail is projected to expand to 28 percent from 26 percent and DTC Digital to reach 15 percent in 2023, up from 12 percent in 2018.
By product type, the highest growth in the North America region is expected in Footwear, running up with a five-year CAGR of 3 to 5 percent. Both Apparel and Accessories are expected to be flat or grow at a 2 percent clip on average over the next five years. Footwear is expected to reach 22 percent of sales by 2023, up from 21 percent in 2018. Apparel is expected to remain at 71 percent
The highest growth among regions is Asia Pacific. Sales are expected to grow at a CAGR in the mid-30 percent from 2017 to 2019, then moderate slightly to a mid-20 percent CAGR from 2020 to 2022 and stay at the mid-20 percent rate in 2023. The region has a potential $32 billion addressable market of Under Armour’s target Focused Performer.
Growth in the Asia Pacific region is expected to be balanced, with 24 to 26 percent five-year CAGR at Wholesale, 22 to 24 percent at DTC Retail and 28 to 30 percent at DTC Digital. By 2023, Wholesale is expected to make up 53 percent of sales; DTC Retail, 18 percent; and DTC Digital, 28 percent.
Growth is expected to be driven by the focus on the Focused Performer in the region and the subsequent halo effect on Sportstyle offerings; wider and deeper channel penetration; and adjacent market and category expansion.
In other regions, EMEA has a $22 billion addressable market targeting the Focused Performer. Growth is expected in the mid-20s percent CAGR over 2017 to 2019, mid-teens between 2020 to 2022 and high-single digits in 2023.
Latin America is expected to deliver low-double digit revenue growth over the next five years and has $9 billion addressable market with the Focused Performer. The focus will be on key markets, investments in retail expansion and leveraging digital as its fastest growth channel.
Under Armour Chairman and CEO Kevin Plank and Patrik Frisk, president and COO, joined 11 other senior executives in detailing the company’s new 5-year plan that is architected around two strategic priorities: Protect This House and Perform With Balance.
Serving as a foundation to its five-year strategy are the following core elements:
- Single-minded focus on innovative athletic performance product and experiences.
- Becoming consumer centric by harnessing data science and analytics along with the world’s largest digitally connected health and fitness community to drive engagement, preference and consideration.
- Continuing to elevate investments toward the largest long-term growth opportunities including the company’s international, direct-to-consumer, footwear and women’s businesses.
- Emphasizing digital engagement and conversion, and retail excellence.
- Protecting the brand through selective, optimal and premium wholesale distribution.
- Delivering balanced, sustainable earnings growth through margin expansion, cost efficiencies and investment in strategic growth initiatives to drive consistent shareholder return.
“Under Armour is designed for resilience and over the past two years, our global team has worked tirelessly to transform our business – operationally, strategically and culturally,” said Under Armour Chairman and CEO Kevin Plank. “With a distinct strategy engineered around a clear, uniquely defined consumer supported by a disciplined go-to-market process and data-driven demand mapping, we have never been more inspired, aligned and capable of achieving our goals.”
“As we execute against our long-term strategy, we remain unwavering in our commitment to protecting and growing the Under Armour brand,” Plank continued. “Led by a strong management team, an accelerated innovation agenda and comprehensive discipline around our commitment to increasing total shareholder return, we look forward to delivering the next chapter in our growth story.”
Updated Fiscal 2018 Outlook
At the meeting, the company provided the following updates to its previous annual outlook, which was issued October 30:
- Gross margin is now expected to be flat versus the previous expectation of “flat to down slightly” versus 45.1 percent in 2017. Adjusted gross margin is expected to improve 20 to 30 basis points compared to 45.2 percent in 2017 as benefits from product costs and lower planned promotional activity are offset primarily by inventory management actions.
- Operating loss is now expected to be approximately $40 to $55 million versus the previously expected $50 to 55 million loss. On an adjusted basis, operating income is now expected to reach the$160 to $165 million range versus the previous $150 to $165 million range.
- Excluding the impact of the restructuring efforts, adjusted diluted earnings per share is now expected to be$0.21 to $0.22 versus the previous expectation of $0.19 to $0.22.
- Year-end inventory for 2018 is now expected to be down at a mid-single-digit rate versus the previous expectation of flat to down slightly.
Revenues are still expected to expand 3 to 4 percent for 2018 and capital expenditures are still expected to be $175 million.
Initial Fiscal 2019 Outlook
In addition to updating its 2018 full year outlook that was provided on its October 30 earnings call, the company presented an initial outlook for the full year 2019:
• Revenue is expected to be up approximately 3 to 4 percent reflecting a low double-digit percentage rate increase in the international business and relatively flat results for North America.
• Gross margin is expected to increase approximately 60 to 80 basis points compared to 2018 adjusted gross margin due to channel mix benefits from lower planned sales to the off-price channel and a higher percentage of direct-to-consumer sales along with more favorable product costs due to ongoing supply chain initiatives.
• Operating income is expected to reach $210 million to $230 million.
• Interest and other expense net is planned at approximately $40 million.
• Effective tax rate is expected to be in the 19 percent to 22 percent range.
• Earnings per share is expected to be in the range of $0.31 to $0.33; and,
• Capital expenditures are planned at approximately $210 million.
Image courtesy Under Armour