Under Armour’s Q1 Revenues Tumble 23 Percent

Under Armour, Inc. reported sales fell 23 percent in the first quarter with approximately 15 percentage points of the decline related to COVID-19. The loss came to $589.7 million after restructuring charges in the first quarter, and the loss before charges was below Wall Street’s target.

“As extraordinary human and economic disruptions related to COVID-19 continue to unfold globally, we are prioritizing the health and welfare of our teammates and consumers,” said Under Armour President and CEO Patrik Frisk. “By instituting disciplined workplace continuity protocols and adhering to the recommendations of local health authorities, we remain vigilant in monitoring this evolving situation and responsibly playing our part.”

“During the first quarter, our results in January and February were tracking well to our plan. 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.”

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.”

First Quarter 2020 Review
On March 31, our Board of Directors approved the previously announced 2020 restructuring plan, whereby the company expects to incur total estimated 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.

• Revenue was down 23 percent to $930 million (down 22 percent currency-neutral) with approximately 15 percentage points of the decline related to COVID-19 pandemic impacts in the quarter.
  • Wholesale revenue decreased 28 percent to $592 million and direct-to-consumer revenue was down 14 percent to $284 million, representing 31 percent of total revenue.
  • North America’s revenue decreased 28 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 3 percent in EMEA (up 4 percent currency-neutral), decreased 34 percent in Asia-Pacific (down 32 percent currency neutral), and increased 8 percent in Latin America (up 11 percent currency- neutral).
  • Apparel revenue decreased 23 percent to $598 million. Footwear revenue decreased 28 percent to $210 million. Accessories revenue decreased 17 percent to $68 million.
• Gross margin increased 110 basis points to 46.3 percent compared to the prior year 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.
• Selling, general and administrative expenses increased 8 percent to $553 million driven primarily by increased legal expenses and amplified marketing related activities.
• Restructuring and impairment charges 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.
• Operating loss was $558 million. Excluding the impact of the restructuring plan and impairments. Adjusted Operating loss was $122 million.
• Net loss was $590 million. Adjusted net loss was $152 million.
• Diluted loss per share was $1.30. Adjusted diluted loss per share was $0.34 compared to Wall Street’s consensus target of 19 cents a year and year-ago earnings of 5 cents a share.

COVID-19 Overview
The coronavirus (COVID-19) pandemic has negatively affected the U.S. and global economies, disrupted supply chains and financial markets, and led to significant travel and transportation restrictions, including mandatory closures and orders to “shelter-in-place”. Amid this global crisis, Under Armour is focused on protecting the health and safety of its teammates and consumers, while working with its customers and suppliers to minimize potential disruptions and supporting its community to address challenges posed by this pandemic. The following provides an overview and status of certain parts of its business and some of the actions the company is taking in response to this situation:

• Business Continuity – as the virus spread rapidly during the first quarter, the company said it has begun adjusting its operations and taking measures to ensure business continuity, as well as implementing government recommendations to increase social distancing, avoid large gatherings and requiring most office-based teammates around the world to work remotely. Within its supply chain, the company quickly adjusted its plans and strategy to manage rapidly changing dynamics in sourcing, logistics and transportation.
• Channel & Business Impacts
  • Asia-Pacific: in China, which comprises a little more than half of its revenue in this region, both owned and partner doors began closing in late January and remained substantially closed through early March when a slowly progressive re-opening process started. By the end of March, more than 80 percent of these locations had re-opened in China and, at this time, substantially all have re-opened. However, traffic in these locations, 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 these countries in the Asia-Pacific region have remained predominantly closed since the end of the first quarter.
  • North America / EMEA / Latin America: beginning mid-March, the company temporarily closed all owned doors across all three of these regions. In addition to these locations, the vast majority of wholesale customer stores where its products are sold also closed down beginning mid-March. At the time of this communication, substantially all of its owned doors and those of its retail partners remain closed. The pace and timing of store openings, and traffic patterns when the stores re-open, remain highly uncertain.
  • Global eCommerce: within its owned eCommerce business, which represents a low double-digit percentage of total revenue, Under Armour said it has seen more favorable trends materializing in North America and EMEA since the beginning of the second quarter.
• Financial Impact and Related 2020 Outlook – following the withdrawal of its 2020 outlook on April 3, local market policies and procedures required to decrease COVID-19 transmission remain largely unchanged around the world. Accordingly, due to the high level of uncertainty with respect to the duration and scope of this current event, the quantification of negative impacts on its financial and operating results cannot reasonably be estimated at this time.
• Cost Base Management– Under expects to reduce its originally planned 2020 operating expenses by approximately
  $325 million through various initiatives, including:
  • Taking actions to limit broader marketing activations until Under Armour said it has greater visibility into the magnitude of virus impact on consumer demand and behavior.
  • Reducing incentive compensation.
  • Temporarily laying off teammates that worked in its own retail stores and U.S.-based distribution centers.
  • Tightening its hiring, contract services and travel and other discretionary and variable costs.
  • Postponing planned capital expenditures contributing to reduced depreciation.
  • 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.
• Liquidity and Cash Flow– given ongoing uncertainty and pressures in global markets, Under Armour moved quickly to prioritize liquidity, cash preservation, and inventory management to enhance its ability to navigate potential short and mid-term challenges:
  • Under Armour said it 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. Additionally, Under Armour is in the process of amending its credit agreement, which is on track to close tomorrow. Given the ongoing disruption throughout the industry, Under Armour expects this amendment will provide improved access to liquidity going forward.
  • Under Armour said it ended the quarter with inventory up 7 percent to $940 million. In anticipation of significant changes in future demand, Under Armour is proactively reducing planned inventory receipts amid the quickly evolving retail environment.
  • Under Armour said it has been prudently balancing the negotiation of extended payment terms with both its customers and vendors.
  • Under Armour said it has reduced its planned capital expenditures to approximately $100 million compared with its previous expectation of approximately $160 million in 2020, with original investments generally expected to continue at such point business conditions stabilize.

Photo courtesy Under Armour