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Under Armour Stock Plummets 18 Percent on Disappointing Q2

Despite a rumored renewal of the brand’s image as a premium athletic brand, Under Armour reported a poor quarter of sales in North America, lowering its expectations for the rest of the year as a result.

In a Nutshell: Under Amour stock fell sharply in early trading on Tuesday after the brand released its second-quarter results before market open. The brand saw its stock fall by more than 18 percent at its lowest point as investors began to grapple with what this means for Under Armour going forward. At the time of writing, its share price had somewhat recovered to $24.22, nearly 12 percent lower than it was at close on Monday afternoon.

However, judging from the brand’s balance sheet, the second quarter could be perceived as a transition period. Under Armour’s inventory decreased 26 percent in Q2 from the comparable period last year, down to $966 million. The athletic brand’s debt obligations also fell 24 percent to a total of $591 million, and cash and cash equivalents jumped 131 percent to $456 million, painting the picture of a brand that used the last quarter to improve its financial fundamentals.

Sales: Total revenue for Under Armour ticked up 1 percent in the second quarter to reach $1.2 billion, just below analyst estimates of $1.21 billion. However, the brand saw losses in its wholesale, North American and apparel revenue during the quarter. Wholesale revenue fell 1 percent to $707 million, slightly offset by a gain of 2 percent in direct-to-consumer revenue at $423 million—both of which represent about 35 percent of Under Armour’s total business.

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North American revenue was down 3 percent in the quarter to $816 million, compared to international revenue which increased by 12 percent in Q2 for a total of $339 million. Under Armour said that sales were up 23 percent in the Asia-Pacific region, accounting for most of that growth, although EMEA sales also rose by 6 percent.

Footwear revenue was up by 5 percent for the brand at $284 million, with apparel falling 1 percent to $740 million.

On the bright side, Under Armour said that its gross margin rose by 170 basis points to reach 46.5 percent during the second quarter. The brand said this was driven by “supply chain initiatives, regional mix and restructuring charges in the prior period,” though the benefits were slightly offset by negative impacts from foreign currency exchanges.

As a result of its struggles in the region, Under Armour officially lowered its expectations for North America from “flat” to a “slight decline” alongside a low-to-mid teen percentage increase in international business.

Earnings: With analysts predicting a loss of 8 cents, Under Armour outperformed its earnings expectations in the second quarter, limiting the loss to 4 cents per share. Overall, the brand’s net loss was $17 million in the quarter, leading to an operating loss of $11 million. However, that was not cause for Under Armour to lower its earnings expectations for the year. Instead, the brand is holding fast to an expected range of 33 cents to 34 cents earnings per share at the end of the fiscal year, slightly higher than its initial outlook of 31 cents to 33 cents.

CEO’s Take: Under Armour chairman and CEO Kevin Plank focused on the brand’s long-term health and praised his team’s progress in making the business more efficient.

“Our second-quarter results give us increasing conviction that our transformation continues to make solid progress across our business, unlocking efficiencies that are driving greater precision, consistency and repeatability,” Plank said. “By staying sharply focused on our long-term strategies—driving our premium athletic brand positioning through industry-leading innovation, geographic expansion and creating deep connections with our consumers—we are on track to deliver against our expectations in 2019.”