Under Armour Inc. reported fourth-quarter earnings that eased 0.9 percent and came in just shy of Wall Street’s consensus estimate. It also gave a soft revenue outlook for the current year and indicated its CFO would be leaving the company.
Highlights of the report:
- 2016 revenues increased 22 percent to $4.8 billion (up 23 percent currency neutral).
- 2016 footwear and women’s businesses both hit $1 billion mark.
- 2016 operating income up 3 percent to $420 million.
- 2017 revenue expected to increase 11 to 12 percent to nearly $5.4 billion.
“We are incredibly proud that in 2016, we once again posted record revenue and earnings, however, numerous challenges and disruptions in North American retail tempered our fourth quarter results,” said Kevin Plank, Under Armour chairman and CEO. “The strength of our Brand, an unparalleled connection with our consumers and the continuation of investments in our fastest growing businesses – footwear, international and direct-to-consumer – give us great confidence in our ability to navigate the current retail environment, execute against our long-term growth strategy and create value to our shareholders.”
Fourth Quarter 2016 Review
Revenues were up 12 percent to $1.3 billion, below Wall Street’s average target of $1.41 billion. The gains were driven by a 5 percent increase in wholesale revenues to $742 million and a 23 percent increase in direct-to-consumer revenues to $518 million. North American revenues grew 6 percent. International revenues, which represented 16 percent of total revenues in the quarter, were up 55 percent (up 60 percent currency neutral) driven by significant growth in the U.K., Germany, China and Australia.
Apparel revenues increased 7 percent to $929 million including strength in golf and basketball. Footwear revenues increased 36 percent to $228 million driven by accelerated growth in running and basketball. Accessories revenues increased 7 percent to $104 million with strength in bags and headwear.
Gross margin was 44.8 percent compared with 48 percent in the prior-year period, as benefits from more favorable product costs were offset by aggressive efforts to manage inventory, changes in foreign currency and the outperformance of footwear and international businesses in the overall mix, which carry lower margins than our apparel and North American businesses.
Selling, general and administrative expenses grew 9 percent to $420 million, or 32.1 percent of sales (down 70 basis points), due to continued investments in the company’s highest growth businesses: footwear, international, and direct-to-consumer.
Operating income declined 6 percent to $167 million. Net income decreased 1 percent to $105 million and diluted earnings per share for the fourth quarter of 2016 were 23 cents compared with 24 cents in the prior-year period. Wall Street’s consensus estimate had been 25 cents.
Full Year 2016 Review
Revenues increased 22 percent to $4.8 billion (up 23 percent currency neutral) including a 19 percent increase in wholesale revenues to $3.1 billion and a 27 percent increase in direct-to-consumer revenues, which reached $1.5 billion. Direct-to-consumer revenues reached 31 percent of total revenues compared with 30 percent in 2015. North American revenues grew 16 percent and international revenues grew 63 percent (up 69 percent currency neutral). For the full year, international revenues represented 15 percent of total revenues, compared with 11 percent in 2015. Apparel revenues increased 15 percent to $3.2 billion led by growth in golf, basketball and training. Footwear revenues grew 50 percent to reach $1 billion, driven by balanced growth across all categories with particular strength in running and basketball. Accessories revenues increased 17 percent to $407 million with strength in bags and headwear and Connected Fitness increased 51 percent to $80 million.
Gross margin was 46.5 percent compared with 48.1 percent as benefits from more favorable product costs were offset by efforts to manage inventory, changes in foreign currency and the outperformance of the footwear and international businesses in the overall mix, which carry lower margins than the apparel and North American businesses. In line with revenue growth, full-year selling, general and administrative expenses grew 22 percent and reached $1.8 billion, or 37.8 percent of revenues.
Operating income increased 3 percent to $420 million and net income grew 11 percent to $259 million. Diluted earnings per share for full year 2016 were 45 cents per share for Class A and B shares and 71 cents per share for Class C shares, reflecting the impact of a $59 million stock dividend paid to Class C shareholders during the second quarter. If the Class C stock dividend had not been paid, non-GAAP diluted earnings per share for all classes for 2016 would have been 58 cents per share. This compares with diluted earnings per share of 53 cents for all classes in 2015.
When it reported third-quarter results on October 25, it had said it continued to expect 2016 net revenues of approximately $4.925 billion, representing growth of 24 percent over 2015, and 2016 operating income of $440 million to $445 million, representing growth of 8 to 9 percent over 2015.
Balance Sheet Highlights – As Of December 31, 2016
Compared with December 31, 2015:
- Cash and cash equivalents increased 93 percent to $250 million.
- Inventory increased 17 percent to $917 million.
- Total debt increased 22 percent to $817 million.
“Looking forward, our successful track record of re-defining performance gives us great confidence that the opportunities for long-term growth at Under Armour have never been greater,” said Plank. “The current environment represents an inflection point to maximize our unique strengths by staying on offense – investing smartly in innovation, deepening our Brand connection with consumers and amplifying our focus on operational excellence – positioning Under Armour as a stronger company.”
Key points related to Under Armour’s full year 2017 outlook include:
- Net revenues are expected to grow 11 to 12 percent to reach nearly $5.4 billion, up 12 to 13 percent currency neutral. Wall Street analysts had been forecasting $6.06 billion.
- Gross margin is expected to be slightly down compared to the prior year with benefits in product costs being offset by continued pressure from changes in foreign currency and sales mix, as the footwear and international businesses continue to outpace the growth of the higher margin apparel and North American businesses.
- Tempered top line results coupled with strategic investments in the company’s fastest growing businesses are expected to cause a decline in operating income to approximately $320 million.
- Other full year assumptions include interest expense of approximately $40 million and an effective tax rate of 32 to 34 percent.
The company’s chief financial officer, Chip Molloy, has decided to leave the company due to personal reasons. Effective February 3, David Bergman, senior vice president, corporate finance and a seasoned member of Under Armour’s accounting and finance organization, will serve as acting CFO. Molloy will remain with the company in an advisory capacity to assist with the transition.
Bergman joined Under Armour in 2005 and is currently responsible for leading all major finance functions including financial planning and analysis, treasury and tax. Prior to this position, he served as corporate controller along with several senior management roles within the company’s accounting and finance organization.
Photo courtesy Under Armour