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Under Armour Warns of $60M Q1 Coronavirus Impact; NYC Flagship in Doubt

Under Armour said it was considering a restructuring initiative that could involve nixing plans for a New York City flagship.

In a Nutshell: Under Armour Inc., in reporting fourth quarter and fiscal year financial results on Tuesday, said its initial 2020 outlook includes an estimated negative impact of the coronavirus outbreak in China of approximately $50 million to $60 million in sales for the first quarter of 2020.

“Given the significant level of uncertainty with this dynamic and evolving situation, full year results could be further materially impacted,” the company said.

The 2020 outlook includes expected revenue to be down by a low single-digit percentage compared to 2019 results. This reflects a mid- to high-single-digit percentage decline in North America, “as work continues to rebalance the business against market demand dynamics and pro-active strategies to better protect the company’s premium brand positioning,” Under Armour said.

The international business is expected to grow at a low double-digit percentage rate. Gross margin is forecast to be up approximately 30 basis points to 50 basis points versus the prior year, thanks to ongoing supply chain initiatives and regional mix benefits.

Operating income is projected to reach $105 million to $125 million. Diluted earnings per share (EPS) is expected to be in the range of 10 cents to 13 cents. Capital expenditures are planned at approximately $160 million compared with $144 million in 2019.

The company also announced it is assessing a potential 2020 restructuring initiative to rebalance its cost base to improve profitability and cash flow generation. In connection with this potential plan, Under Armour is considering $325 million to $425 million in estimated pre-tax charges for 2020, including approximately $225 million to $250 million related to the possibility of foregoing opening a flagship store in New York City, while pursuing sublet options for the long-term lease.

Based on initial assessments and timing of a potential restructuring initiative, the company could realize around $30 million to $50 million in pre-tax benefits in 2020. The firm expects to complete its assessment during the first quarter of 2020, and subject to board review and approval, would announce any potential restructuring charges upon adoption of any plan.

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Sales: Net revenue for the fourth quarter ended Dec. 31 was up 3.6 percent to $1.44 billion from $1.39 billion in the year-ago period. For the full year, revenue rose 1.4 percent to $5.27 billion from $5.19 billion in 2018.

Footwear revenue increased 10.3 percent to $259.33 million in the fourth quarter and was up 2.2 percent to $1.09 billion for the year. Apparel revenue rose 0.2 percent to $970.3 million in the quarter and dipped 0.2 percent to $3.46 billion for the year, while accessories revenue increased 1.6 percent in the final three months of 2019 and fell 1.5 percent to $422.5 million for the year.

Earnings: The fourth quarter saw a net loss of $15.3 million or 3 cents per diluted loss per share, inclusive of a $23 million tax expense, which had a 5 cent negative EPS impact related to the recording of valuation allowances against certain of the company’s U.S. state deferred tax assets, and a $39 million impairment charge that had an 8 cent negative EPS impact related to the company’s equity interest investment in its Japan licensee. This compared to net income of $4.22 million in the fourth quarter of 2018.

Gross margin increased 230 basis points to 47.3 percent compared to the prior year, driven primarily by pricing, including lower discounts to wholesale partners, channel mix and supply chain initiatives.

Net income for 2019 was $92 million or 20 cents diluted EPS, inclusive of a 5 cents negative EPS impact related to the recording of valuation allowances against certain of the company’s U.S. state deferred tax assets and a 9 cent negative EPS impact related to the impairment of the company’s equity interest investment in its Japan licensee.

For the year, gross margin was 46.9 percent, a 180-basis point improvement from 45.1 percent in the prior year, pushed ahead mainly by supply chain initiatives, channel mix and prior-period restructuring charges.

CEO’s Take: Patrik Frisk, president and CEO, said: “Under Armour is an operationally better company following our transformation over the past few years, with a clearly defined and focused strategy, enhanced go-to-market process, cleaner inventories and a stronger balance sheet. However, ongoing demand challenges and the need to drive greater efficiencies in our business requires us to further prioritize our investments to put our company in the best position possible to achieve sustainable, profitable growth over the long-term.”