Under Armour, like Nike, is the latest brand looking to reduce its reliance on volatile channels. The athleticwear and footwear brand is planning to exit between 2,000 and 3,000 wholesale locations in North America by 2022, leaving the company with approximately 10,000 stores remaining, chief financial officer David Bergman said in the third-quarter earnings call. Bergman did not indicate which retailers or categories the company would exit.
While wholesale sales for Under Armour slipped 7 percent year over year to $830 million in the third quarter, a major improvement from the second quarter’s 58 percent decline, growth is coming from its direct-to-consumer channel, which increased 17 percent to $540 million. The brand saw e-commerce sales in the quarter climb 50 percent.
In a Nutshell: “Within DTC, we plan to continue to pull back on promotions and discounts to drive our premium brand positioning, which we expect will result in some near-term implications on top line results yet continue to support healthier margins as well,” Bergman said.
Over the past year, Under Armour has significantly invested in its brick-and-mortar business, with total Factory House and Brand House stores increasing from 370 in 2019 to 428 in 2020.
Both adjusted earnings per share and revenue topped Wall Street estimates, with the former reaching 26 cents per share instead of the 3 cents expected, according to Refinitiv data. Revenue for the third quarter significantly outperformed expectations, at $1.43 billion vs. $1.16 billion expected, due to higher-than-anticipated consumer demand.
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Third-quarter inventory was up 17 percent to $1.1 billion, even with “less than expected cancellations on wholesale orders,” according to Bergman, who said the company’s fourth quarter inventory should finish approximately 10 percent up.
“Fortunately, our second quarter carryover product—meaning inventory that went unfulfilled due to store closures during that period—allowed us to meet part of this unexpected demand,” Under Armour CEO Patrik Frisk said on the call. “Additionally, inventory sold through at lower than expected discounts and markdowns.”
Under Armour expects a more upbeat 2020 than previously anticipated due to this increased sell-through, now saying full-year revenue will be down by a “high-teen” percentage rate. Previously, it had been calling for a drop of 20 to 25 percent in the second half of the year.
For the fourth quarter, the company now expects revenue to be down at a “low-teen” percentage rate, versus the previous down 20 to 25 percent expectation.
A few factors contribute to the revenue dip as the company expects changes in supply chain timing to result in more delays in product deliveries from late 2020 to early 2021. Additionally, the Baltimore-based athletic wear firm has lower planned excess inventory sales to the off-price channel. As part of the DTC push, off-price now only represents 4 percent of total revenue at Under Armour, which is at the lower end of the company’s previously disclosed range.
The company also anticipates a 50 percent decline in licensing revenue due to lower contractual royalty minimums and contract settlements realized in the prior year.
Gross margin decreased 40 basis points (0.4 percentage points) to 47.9 percent compared to the prior year, driven primarily by negative impacts from Covid-related discounting and product mix partially offset by supply chain efficiencies and channel mix. For the fourth quarter, the company cautions that there will be “meaningful” gross margin pressure, primarily related to consumer expectations around a more promotional environment compared to last year.
But for the full year, 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 the Covid-related discounting.
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.
Under Armour also announced that it has sold the MyFitnessPal platform to private equity firm Francisco Partners for $345 million.
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.
Capital expenditures for the year are approximately $80 million compared to $144 million in 2019.
Net Sales: Total revenue was flat at $1.4 billion compared to the prior year, and a significant quarter-over-quarter improvement over the second quarter, which saw declines of 41 percent to $707.6 million.
Wholesale revenue decreased 7 percent to $830 million, while direct-to-consumer revenue increased 17 percent to $540 million, driven by nearly 50 percent growth in e-commerce.
The dichotomy in success doesn’t just come in the channels where Under Armour sells; it comes in the regions it sells in as well as the major categories offered.
Revenue in North America declined 5 percent to $963 million, while international revenue increased 18 percent to $433 million (up 17 percent on a currency-neutral basis). Within the international business, revenue increased 31 percent in the EMEA region (up 26 percent on a currency-neutral basis), increased 15 percent in Asia-Pacific (up 16 percent on a currency-neutral basis), and decreased 15 percent in Latin America (down 7 percent on a currency-neutral basis).
And although apparel revenue decreased 6 percent to $927 million, footwear revenue increased 19 percent to $299 million, driven by considerable strength in the company’s run and training categories. Accessories revenue increased 23 percent to $145 million, with nearly all of the growth coming through the company’s SportsMasks.
Net Earnings: Third-quarter net income for Under Armour was $38.9 million with diluted earnings per share sitting at 9 cents, down significantly year over year from $102.3 million, or 23 cents a share, a year earlier. Adjusted net income was $118 million, while adjusted diluted earnings per share were 26 cents.
Operating income was $58.5 million, much lower than the $138.9 million in the third quarter of 2019. Excluding the impact of $74 million in restructuring and impairment charges, adjusted operating income was $133 million.
Operating losses for the full year are expected to reach approximately $800 million to $860 million. Excluding the impact of restructuring and impairment charges, which have cost the company $410 million, the adjusted operating loss is expected to reach approximately $140 million to $150 million.
The restructuring and impairments charges are part of Under Armour’s reorganization that began in April, with costs reaching $600 million as 600 jobs were eliminated.
CEO’s Take: Frisk was optimistic about the opportunities for the future due to the full-year gross margin results.
“One of the things that we’re very proud of this year is that we’ll be able to grow our margins in a year where we’re taking a lot of revenue out of the top line,” Frisk said in the call. “To be able to do that you’ve got to be able to command a price for your product. And we’re clearly able to do that with less discounting, more premium pricing and more premium positioning.”
Frisk also applauded recent footwear launches as drivers for success, pointing to the first-ever women’s specific basketball shoe, the UA Hovr Breakthru, the UA Hovr Machina, the UA Hovr Phantom 2 and the UA Project Rock 3 training series as standouts that allow them to compete at the “premium level.”