Under Armour Inc.’s third-quarter results topped analyst targets due to improving performance in North America and a 19 percent sales gain in footwear. The company also provided a full-year outlook that was better than expected.
“Our third-quarter results reflect considerably better than expected performance due to higher demand and our strong execution, especially in North America. We believe that the critical mass of our transformational challenges is behind us, and we remain sharply focused on operational improvements and financial discipline to accelerate strategies to create sustainable, long-term growth for the Under Armour brand and our shareholders,” said Patrik Frisk, president and CEO
Third Quarter 2020 Review
- Revenue was flat at $1.4 billion compared to the prior year. Wall Street’s consensus target had been $1.16 billion.
- Wholesale revenue decreased 7 percent to $830 million and direct-to-consumer revenue increased 17 percent to $540 million, driven by continued strong growth in eCommerce.
- North America revenue decreased 5 percent to $963 million and international revenue increased 18 percent to $433 million (up 17 percent currency-neutral). Within the international business, revenue increased 31 percent in EMEA (up 26 percent currency-neutral), increased 15 percent in Asia-Pacific (up 16 percent currency-neutral), and decreased 15 percent in Latin America (down 7 percent currency-neutral).
Apparel revenue decreased 6 percent to $927 million. Footwear revenue increased 19 percent to $299 million. Accessories revenue increased 23 percent to $145 million.
- Gross margin decreased 40 basis points to 47.9 percent compared to the prior-year, driven primarily by negative impacts from COVID-19 related discounting and product mix partially offset by supply chain efficiencies and channel mix.
Selling, general & administrative expense was relatively unchanged from the prior year at $554 million.
- Restructuring and impairment charges were $74 million consisting of $70 million of restructuring and related impairment charges and $4 million from long-lived asset impairments. Through the third quarter, the company has recognized $550 million of restructuring and impairment charges consisting of $410 million in restructuring and related impairment charges ($326 million in non-cash and $84 million in cash) and $140 million from impairments of long-lived assets and goodwill.
- Operating income was $59 million. Excluding the impact of restructuring and impairment charges, adjusted operating income was $133 million.
- Net income was $39 million, or 9 cents a share, down from $102.3 million, or 23 cents, a year ago.
- Adjusted net income was $118 million, or 26 cents a share, representing a gain of 15.3 percent. Wall Street’s consensus target had been 3 cents a share.
- Inventory was up 17 percent to $1.1 billion.
Cash and Liquidity
The company ended the third quarter with Cash and Cash Equivalents of $866 million. No borrowings were outstanding under the company’s $1.1 billion revolving credit facility at the end of the third quarter.
Fiscal 2020 Outlook
Due to ongoing uncertainty related to COVID-19 and its potential effect on global markets, the company expects material impacts on its business results for the remainder of 2020 and into 2021. Key points related to Under Armour’s full-year 2020 outlook include:
- Revenue is expected to be down at a high-teen percentage rate compared to 2019 results, reflecting a low twenties percentage rate decline in North America and a high-single-digit percentage rate decline within the international business.
- For the fourth quarter, the company now expects revenue to be down at a low-teen percentage rate, versus the previous down 20 percent to 25 percent expectation, impacted by the following factors:
- Expected year-end timing impacts from COVID-19, related to customer order flow and changes in supply chain timing resulting in more planned spring product deliveries in early 2021 versus late 2020.
- An anticipated substantial decline in licensing revenue due to lower contractual royalty minimums and contract settlements realized in the prior year.
- Lower planned excess inventory sales to the off-price channel.
- Gross margin is expected to be up 20-to-40 basis points versus 2019 due to channel mix benefits and supply chain efficiencies, offset mainly by discounting related to COVID-19. For the fourth quarter, the company anticipates gross margin pressure primarily related to expectations around a more promotional environment relative to the prior year.
- Operating loss is expected to reach approximately $800 million to $860 million. Excluding the impact of restructuring and impairment charges, the adjusted operating loss is expected to reach approximately $140 million to $150 million.
- Adjusted interest and other expense net are planned at approximately $55 million.
- Adjusted diluted loss per share is expected to be in the range of $0.47 to $0.49.
- Inventory is expected to be up approximately 10 percent at the end of 2020.
- Capital expenditures are planned at approximately $80 million compared to $144 million in 2019.
In the second quarter, Under Armour had warned that sales would be down as much as 20 percent to 25 percent in the back-half. Wall Street had been expecting a decline of 25.7 percent for the year. The company did not provide an outlook while releasing second-quarter results due to uncertainty around the pandemic.
Under Armour continues to monitor COVID-19 globally, complying with guidance from government entities and public health authorities. The company remains focused on protecting its employees and consumers’ health and safety while working with its suppliers and customers to minimize potential disruptions. The vast majority of locations where Under Armour is sold are now open. In the company’s owned and operated retail stores, traffic trends remain challenged; however, conversion trends remain strong. Additionally, the company experienced significant eCommerce growth around the world during the quarter. The fourth quarter and full-year outlook provided today assume the vast majority of retail locations where UA is sold will continue to remain open and operate under similar health and safety requirements for the remainder of the year.
MyFitnessPal Platform Sale Announcement
In a separate press release, the company announced that it has entered into a definitive agreement to sell the MyFitnessPal platform to Francisco Partners, a private equity firm. The transaction value is $345 million, inclusive of the achievement of potential earn-out payments and subject to working capital and other customary adjustments. The transaction, which is expected to close in the fourth quarter of 2020, is subject to customary closing conditions and regulatory approvals. The fourth quarter and full-year outlook provided today do not include the impact of the potential sale of MyFitnessPal.
MyFitnessPal is currently reported within Under Armour’s Connected Fitness segment, which also contains the MapMyFitness and Endomondo platforms. In conjunction with this announcement, the company indicated that it would discontinue its Endomondo platform at the end of 2020. The MapMyFitness platform, which includes MapMyRun and MapMyRide, remains a crucial element of Under Armour’s digital strategy, as does its connected footwear business.
Photo courtesy Under Armour/UA HOVR Summit Fat Tire