Under Armour saw net sales increase 2.7 percent to $1.27 billion in its transition quarter as the athleticwear and footwear maker felt the brunt of supply chain headwinds spanning order cancellations to store closures in China. The Baltimore company’s net losses of $59.6 million largely stemmed from charges related to its 2020 restructuring plan.
The losses and the tepid sales growth scared off investors, with Under Armour stock plunging as much as 26 percent in Friday morning trading.
In a Nutshell: In the quarter, apparel outperformed with 8.2 percent category growth to $876.6 million. Footwear saw 4 percent sales declines to $296.7 million, while accessories tumbled 17.5 percent to $96.8 million as 2020’s strong Sportsmask sales leveled off.
In an earnings call, Under Armour president and CEO Patrik Frisk highlighted the company’s new Baltimore headquarters that will help further goals of using 80 percent renewable energy by 2025 and reducing greenhouse gas emissions 30 percent by 2030 when the facility opens shortly.
Inventory was down 3.2 percent to $824.5 million from $851.8 million in the year-ago period, largely driven by inbound shipping delays due to Covid-related supply chain pressures. The disruptions significantly impacted revenue in the Asia-Pacific region, which fell 13.5 percent.
“We encountered restricted store hours and store closures in China due to Covid-19, which caused significant reductions in retail traffic,” Frisk told Wall Street analysts. “Together, these developing challenges weighed on our transition quarter revenue by about 1.5 percentage points.”
Gross margin decreased 350 basis points (3.5 percentage points) to 46.5 percent compared to the prior year’s 50 percent margin, driven primarily by 330 basis points (3.3 percentage points) of impact driven by elevated freight expenses. Ocean freight “came in considerably higher than we had expected” along with increased air freight utilization, Frisk said.
Chief financial officer David Bergman said the company is looking to counter inflation and higher costs by raising some prices in the third quarter and fourth quarters.
“We’ve been able to do some pricing action for fall/winter 2022 product and then a fair amount more that we’re executing for spring/summer 2023 product,” Bergman said. “And then there’s a little bit of trail out of things we still believe we have opportunity in fall/winter 2023. So again, it will be a build of the benefit on that pricing, but it’s been very strategic, not generally across-the-board increases, but in areas where we really feel from a price value and innovation perspective we have some opportunities. We’re excited to be able to drive that through and feel the benefit of that as we go further into the year.”
The reporting period is considered a transition quarter as Under Armour shifts its fiscal year end from Dec. 31 to March 31. After the three-month transition period, fiscal year 2023 run from April 1, 2022 through March 31, 2023. Consequently, there will be no fiscal year 2022.
For the 2023 fiscal year, Under Armour expects revenue to increase 5 to 7 percent over last year’s $5.7 billion, reflecting a mid-single-digit growth rate in North America and a low-teens growth in international.
This includes approximately 3-percentage-point headwinds related to order cancellations affected by capacity issues, supply chain delays and emergent Covid-19 impacts in China. For the first quarter alone, these headwinds will have a 10-percentage-point impact.
Gross margin is expected to be down 150-to-200 basis points (1.5-to-2 percentage points) compared to the prior-year period’s adjusted gross margin of 49.6 percent due to expected inflationary pressures on freight and product costs, unfavorable channel mix, and changes in foreign currency.
Operating income is expected to reach $375 to $400 million versus last year’s adjusted operating income of $424 million.
Diluted earnings per share is expected to be between 79 cents and 84 cents versus the comparable baseline period of 47 cents. This includes a 28-cent tax benefit expected to be realized in the fourth quarter. Adjusted diluted earnings per share is expected to be between 63 cents and 68 cents, which falls near the prior year’s 68 cents per share.
At the end of the transition quarter, cash and cash equivalents were $1 billion, and no borrowings were outstanding under a $1.1 billion revolving credit facility.
Net Sales: Total net sales at Under Armour were $1.27 billion in the transition period, up 2.7 percent from $1.24 billion in the prior year’s first quarter.
Revenue, which includes licensing, was up 3.5 percent to $1.3 billion (up 4 percent currency neutral) compared to the prior-year period’s $1.26 billion.
Wholesale revenue increased 4 percent to $829 million, up from $800 million a year ago.
Direct-to-consumer revenue increased 1 percent to $441 million from the prior year’s $436 million, driven by 2 percent growth in e-commerce, which represented 45 percent of the total DTC business during the quarter. Owned and operated store revenue growth was flat during the quarter.
North America revenue increased 4.4 percent to $841.1 million and international revenue increased 0.7 percent to $455.6 million (up 3 percent currency neutral). Within the international business, revenue increased 17.6 percent in EMEA (up 22 percent currency neutral) to $228.1 million, decreased 13.5 percent in Asia-Pacific (down 13 percent currency neutral) to $181.9 million and decreased 5.5 percent in Latin America (down 5 percent currency neutral) to $45.6 million.
Net Earnings: Under Armour’s total net loss was $59.6 million, with diluted losses per share coming in at 13 cents, down from last year’s net income of $77.8 million. The impact of restructuring and impairment charges was $56.7 million, leading the company to report an adjusted net loss of $2.9 million, with the adjusted diluted loss per share coming in at 1 cent.
The operating loss was $46 million, with adjusted operating income coming it at $10.7 million.
CEO’s Take: Frisk also teased a resale program and a loyalty test pilot in North America by the end of the year, with the latter already showing success in China. More information on the resale project will come when Under Armour releases its 2022 Sustainability Report in the fall, he added.
“From a process viewpoint as we continue to utilize even more recycled material in our own manufacturing methods. We are working hard to establish a circularity model to ensure we’re leaving our home field cleaner and less depleted than before,” Frisk said.