By Eric Smith
Shares of Under Armour Inc. rose $1.24, or 6.6 percent, to $20 at market close Thursday following the company’s early morning announcement that it would increase the number of job cuts as part of a broader restructuring plan.
Under Armour, which raised guidance for 2018 while announcing the cuts, said it will reduce the company’s global workforce by 400 jobs, or about 3 percent of its employee count, which should lead to more manageable costs.
In a statement, Under Armour said this update to its 2018 restructuring plan is the last one, and that it was based on an organizational and process redesign intended to optimize the company’s strategic growth initiatives and overall business performance.
Previously, Under Armour expected to incur total estimated pre-tax restructuring and related charges of approximately $190 million to $210 million in connection with its 2018 restructuring plan.
Following further evaluation, the company has identified approximately $10 million of cash severance charges related to an approximate 3 percent reduction in its global workforce. The company now expects about $200 million to $220 million of pre-tax restructuring and related charges to be incurred in 2018. The reduction in workforce, expected to be completed by March 31 of next year, represents the final component and update to the company’s 2018 restructuring plan.
“In our relentless pursuit of running a more operationally excellent company, we continue to make difficult decisions to ensure we are best positioned to succeed,” David Bergman, Under Armour CFO, said in a statement. “This redesign will help simplify the organization for smarter, faster execution, capture additional cost efficiencies, and shift resources to drive greater operating leverage as we move into 2019 and beyond.”
The company commented on the 2018 restructuring plan in February during the Q4 2017 earnings call, with Under Armour’s chairman and CEO, Kevin Plank, reiterating that the company was firm in its goals of becoming “operationally excellent” by 2019.
“After years of rapid growth and building a globally recognized brand, the dynamic landscape of 2017 was a catalyst for us to begin strategically transforming Under Armour into an operationally excellent company,” Plank said on the Feb. 13 earnings conference call with analysts. “A year into this journey, our fourth quarter and full year results demonstrate that the tough decisions we’re making are generating the stability necessary to create a more consistent and predictable path to deliver long-term value to our shareholders.”
Thursday’s move was well received on Wall Street—mostly, anyway. Not only did shares increase following the announcement and stay that way until closing bell, but analysts lauded the move as Under Armour navigates its way through the final states of restructuring.
Camilla Yanushevsky of CFRA wrote in a note to investors: “We are more optimistic on upside potential of [Under Armour’s] shares, following [the company’s] announcement this morning that it will cut about 400 jobs. In our view, the athletic apparel maker’s push to cut costs will improve operating margins and can shift resources toward technological innovation that will better position [Under Armour] to capture market share from rivals Nike and Adidas.”
And Jim Duffy of Stifel wrote in a note to investors: “We see value in the Under Armour brand. At approximately $5 billion in sales with approximately 3 percent operating margins, the business is meaningfully underperforming the structural margin potential of low-double digits. With evidence of improving sales quality and cost structure management, we expect the stock begins to anticipate structural capacity for margin improvement before it shows in reported results and shares outperform.”
Not all analysis of Under Armour’s announcement was rosy, however. Sam Poser of Susquehanna Financial Group LLLP wrote in a note to investors: “While we are raising EPS estimates, today’s revision to FY18 guidance and the updated restructuring efforts do not change our negative stance. UAA’s top-line profitable growth remains tepid and visibility into any material inflection remains unclear. The stock is currently trading at ~63x the FY19 consensus estimate. We recognize that UAA is at historically low EBIT margins and there is ample opportunity for margin expansion. However, we contend that revenue growth of at least HSD with healthy margins, which is necessary to right ship, will not occur anytime soon.”
In other words, Poser stated in the notes’ title, “restructuring efforts and updated FY18 guidance do not equal improving fundamentals.”
Here is Under Armour’s new full-year 2018 financial outlook:
- Operating loss is now expected to be approximately $60 million versus the previous range of $50 million to $60 million. Excluding the impact of the restructuring plan, adjusted operating income is now expected to be $140 million to $160 million versus the prior expectation of $130 million to $160 million.
- Excluding the impact of the restructuring efforts, adjusted diluted earnings per share is now expected to be in the range of 16 cents to 19 cents versus the previously expected range of 14 cents to 19 cents.
The company had also ramped up its restructuring efforts when it reported second-quarter earnings on July 26. When the program was first announced on February 13, pre-tax restructuring and related charges were pegged at approximately $110 million to $130 million.
On July 26, the company said another $80 million of additional restructuring initiatives has been identified and restructuring costs could expand to a range of $190 million to $210 million for 2018. In the second quarter, pre-tax costs totaling $85 million consisting of $64 million in cash related charges and $21 million in non-cash charges were recognized.
Based on the updated restructuring plan at the time, the costs of $190 million to $210 million was expected to include:
- Up to $155 million in cash related charges, consisting of up to $75 million in facility and lease terminations and up to $80 million in contract termination and other restructuring charges and
- Up to $55 million in non-cash charges comprised of up to $20 million of inventory related charges and up to $35 million of asset related impairments.
The company is expected to report third-quarter earnings at the end of October.
Photo courtesy Under Armour