As it awaits the reopening of stores and distribution channels, Under Armour described its balance sheet as “well-managed,” despite reporting sizable quarterly declines in apparel, footwear and accessories revenue.
In a Nutshell: Under Armour Inc. said Monday in reporting first-quarter financial results that amid the coronavirus pandemic that negatively affected the U.S. and global economies, disrupted supply chains and led to significant travel and logistics restrictions, the company quickly adjusted its plans and strategy to manage rapidly changing dynamics in sourcing, logistics and transportation.
In China, which comprises a little more than 50 percent of revenue in Asia-Pacific region, both owned and partner doors began closing in late January and remained substantially closed through early March, when a progressive re-opening process began. 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.
In North America, Latin America and the Europe, Middle East and Africa (EMEA) region, the company temporarily closed all owned-door stores beginning in mid-March. In addition to these locations, the vast majority of wholesale customer stores where its products were sold also closed down to curtail the COVID-19 outbreak. Currently, substantially all owned-door stores and those of its retail partners remain closed. The pace and timing of store openings, and traffic patterns when they do, remain highly uncertain.
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Within its owned e-commerce business, which represents a lo- double-digit percentage of total revenue, Under Armour has seen more favorable trends materializing in North America and EMEA since the beginning of the second quarter.
Following the withdrawal of its 2020 outlook on April 3, local market policies and procedures required to decrease coronavirus transmission remain largely unchanged around the world. Accordingly, Under Armour is unable to estimate the pandemic’s financial impact, given the ongoing uncertainty on multiple fronts.
Under Armour said it is expecting to reduce its originally planned 2020 operating expenses by approximately $325 million through various initiatives. These include taking actions to limit broader marketing activations until it has greater visibility into the magnitude of virus impact on consumer demand and behavior; reducing incentive compensation, temporarily laying off workers in stores and U.S.-based distribution centers; tightening hiring, contract services, and travel and other discretionary and variable costs; and postponing planned capital expenditures contributing to reduced depreciation.
The company also moved to prioritize liquidity, cash preservation and inventory management to enhance its ability to navigate potential short and mid-term challenges. Under Armour ended the 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 said it is in the process of amending its credit agreement, which is on track to close Tuesday.
On March 31, the company’s board of directors approved a restructuring plan under which Under Armour expects to incur estimated pre-tax restructuring and related charges in the range of $475 million to $525 million during 2020, including up to $350 million of non-cash charges and $175 million of cash-related restructuring charges.
Sales: Revenue in the first quarter ended March 31 was down 23 percent to $930 million, with approximately 15 percent of the decline related to COVID-19 pandemic impacts. 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 revenue decreased 28 percent to $609 million and revenue from international business fell 12 percent to $287 million, representing 31 percent of total revenue. Within the international business, revenue increased 3 percent in EMEA and 8 percent in Latin America, but decreased 34 percent in Asia-Pacific.
Apparel revenue fell 23 percent to $598 million, footwear revenue decreased 28 percent to $210 million and accessories revenue declined 17 percent to $68 million.
Earnings: In the quarter, Under Armour incurred a net loss of $590 million compared to earnings of $22.48 million in the year-ago period. Excluding the impact of the restructuring plan and impairments, the adjusted net loss was $152 million.
In the three months, restructuring and impairment charges were $436 million, consisting of $301 million in restructuring and related impairment charges and $135 million from impairments of long-lived assets and goodwill.
The operating loss in the quarter was $558 million, with an adjusted operating loss of $122 million. The diluted loss per share was $1.30, while the adjusted diluted loss per share was 34 cents.
Gross margin increased 110 basis points to 46.3 percent compared to the prior year, driven primarily by channel mix that benefitted from lower off-price sales, partially offset by the negative impacts from COVID-19 related discounting and changes in foreign currency.
Selling, general & administrative expenses increased 8 percent to $553 million, mostly due to increased legal expenses and amplified marketing related activities.
CEO’s Take: President and CEO Patrik Frisk, said: “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. 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.”
“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,” Frisk added. “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.”