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Footwear and Markdowns Define Under Armour’s Q3

Under Armour outperformed Wall Street estimates in its third quarter, with revenue climbing 3.4 percent to $1.58 billion on net income of $121.6 million.

But the Baltimore athletic company—which will see Marriott International’s Stephanie Linnartz take the reins as CEO on Feb. 27—expects it’ll rely on promotions longer than it initially anticipated.

In a Nutshell: Under Armour is currently broadening its offering to focus on the “16-to-20-year-old varsity athlete,” with interim CEO and president Colin Browne reiterating the brand’s move into casual wear as a “significant long-term growth opportunity.” The company is segmenting product to better balance its “good, better and best” selling items and optimize the merchandising mix.

“Consumers tell us that varsity athletes tend to buy more frequently at fuller and higher price points than other groups throughout the U.S.,” Browne said in a company earnings call on Wednesday. “In this work, we’re going category by category, addressing what premium looks like at every price point. We’re also determining opportunities to drive additional ‘better-’ and ‘best-level’ product assortment, and what the marriage of innovation and style should like look like as if we’re designing an incumbent.”

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Footwear revenue carried Under Armour in the quarter, increasing 25.3 percent to $354.4 million from $282.7 million in the year-prior. Browne said the positive results benefited from better product availability, with its core running shoes including Rogue, Assert and Pursuit showing strength in the period.

Apparel revenue decreased 2.1 percent to $1.08 billion from $1.1 billion in the year-ago quarter. Accessories revenue declined 1.7 percent to $104.9 million, down from $106.7 billion.

Inventory was up 50.1 percent to $1.22 billion from the prior year’s $811.4 million. However, Browne said that inventory was lean in the prior-year quarter, “so a large part of this increase and increase over the next few quarters is simply normalizing to levels to us being close to a $6-billion-dollar brand.”

According to chief financial officer David Bergman, Under Armour has done a deep dive to identify seasonless products it can choose to pack-and-hold over to next year instead of liquidating it at margin-killing prices right now.

Gross margin declined 650 basis points (6.5 percentage points) to 44.2 percent compared to the prior year’s 50.7 percent, driven primarily by higher promotions, mix impacts related to higher distributor and footwear revenue, and the adverse effects of changes in foreign currency.

The higher promotional activity had a 4-percentage-point negative impact on total gross margin. Browne said “higher than planned markdowns within our wholesale business and increased promotional activities within our DTC business” were the culprit.

Addressing the current inventory glut’s impact on the promotional environment, Bergman said the markdowns will take “longer than what we would have expected maybe 90 days back.”

“The consumers are out there, the traffic is reasonable, but conversion is a little bit challenged,” said Bergman. “I think folks are being a little bit more cautious here for a while and so we expect that pressure to continue as we move through this calendar year.”

For the remaining fiscal year, Under Armour reaffirmed its revenue and operating income guidance, but expects improvements with adjusted diluted earnings per share.

Under Armour expects revenue to grow at a low single-digit percentage rate on a reported basis, and at a mid-single-digit pace on a currency-neutral basis. Operating income is expected to reach $270 million to $290 million.

Adjusted diluted earnings per share is now forecast to range between 52 cents and 56 cents against the previously expected range of 44 cents to 48 cents. This includes more favorable foreign currency developments, a slightly lower tax rate and deeper-than-expected selling, general & administrative (SG&A) expenses.

Gross margin is expected to decline at the higher end of the previously provided 375 to 425 basis point (3.75 percentage points to 4.25 percentage points) range.

Capital expenditures are now expected to be approximately $200 million, down from the previous expectation of approximately $225 million.

Cash and cash equivalents were $850 million at the end of the quarter. Under Armour has no borrowings outstanding under its $1.1 billion revolving credit facility.

Net Revenue: Revenue at Under Armour was up 3.4 percent to $1.58 billion (up 6.9 percent currency neutral) compared to the $1.5 billion generated in the prior-year quarter.

Wholesale revenue increased 6.8 percent to $819.8 million, and direct-to-consumer (DTC) revenue decreased 0.7 percent to $715.2 million. DTC revenue saw a 6 percent decline in owned and operated store revenue, partially offset by a 7 percent increase in e-commerce revenue, which represented 45 percent of the total DTC business during the quarter.

North America revenue was down 2.4 percent to $1.03 billion (down 1.8 percent currency neutral) from the year prior, and international revenue increased 14 percent to $527 million (up 24.4 percent currency neutral). Within the international business, revenue increased 32.5 percent in EMEA (up 46 percent currency neutral) to $265.3 million, decreased 8.8 percent in Asia-Pacific (up 1 percent currency neutral) to $198 million, and increased 44.9 percent in Latin America (up 41 percent currency neutral) to $63.8 million.

Net Earnings: Third-quarter net income was $121.6 million on diluted earnings per share of 27 cents, compared to last year’s $109.7 million on diluted earnings per share of 47 cents.

Excluding a $45 million earn-out benefit in connection with the sale of the MyFitnessPal platform and a $1.7 million tax benefit, adjusted net income was $75.6 million. Adjusted diluted net income per share was 16 cents.

Operating income was $94.7 million, with an operating margin of 6 percent of net sales. This represents an increase from the $86.1 million in the prior-year third quarter, with an operating margin of 5.6 percent.

CEO’s Take: Despite the expectations that Under Armour will keep up its 50 percent inventory growth pace through the 2023 fiscal year, Browne said the company was in a different place than much of the industry due to the lagging inventory in the prior fiscal year.

“We were running the constraint model last year. We also walked away from some demand because we just couldn’t see where we’d be able to service it. Our inventory levels were incredibly slim last year,” said Browne. “We’re now getting our inventory back to what I would call kind of a steady-state number—that 50 percent increase is a big number. But when you actually look at the amount of inventory we’re now holding, we’re holding the right level of inventory for a $6 billion business. We were comfortable with where we are from an inventory perspective, and our inventory is right-sized, for the way in which we expect our business to evolve next year.”