In his first call with analysts as Under Armour CEO, Patrik Frisk didn’t mince words.
“First and foremost, I’m not satisfied with where we are today,” said Frisk, who became Under Armour chief in October. “As a company, we’ve made significant operational progress in the form of better systems, structure and processes, as well as a considerably stronger balance sheet and the ability to generate cash.”
There’s still much to be done on the digital front, however. Frisk described Under Armour’s e-commerce platform as “an ailing and old one” that will be replaced with a new state-of-the-art platform this summer. Following close to two years of “small scale” tests in the EMEA region, the athletic brand believes “this new platform together with investments into personalization and CRM later this year will enhance our ability to elevate our storytelling and experience for our consumers,” he added.
“As a brand, however, we see a paradox of two challenges in front of us: Continued softer demand in North America, as we work through our elevated inventory and multiple years of discounting, and a highly committed cost structure which is taking longer to unpack and is limiting us from being able to spend as aggressively as we would like to, to increase brand consideration,” he said. “Next, we are firm in our commitment to staying centered in athletic performance and bringing authenticity to the brand through innovative products, solutions and experiences.”
This came after the company reported a net loss of $15.3 million, inclusive of a $23 million tax expense, in the fourth quarter. Net revenue for the fourth quarter ended Dec. 31 was up 3.6 percent to $1.44 billion.
“To thoroughly execute a strategic operational and cultural transformation of this magnitude takes time, and quite simply, the realization of milestones and progress within certain areas of our business is taking longer than we anticipated,” Frisk said.
With that said, in a “highly competitive and dynamic consumer backdrop,” the company is making progress, the CEO said.
“We have healthier inventories, less debt, and have meaningfully improved cash generation through a more disciplined approach within our sales and operations planning process,” Frisk said.
Along with all companies that do business in China, there are currently potential operational and financial impacts to Under Armour from the coronavirus outbreak, including “several unknowns that we’re continuing to monitor and assess, not only for the APAC region, but also on a global basis,” he said.
Under Armour has almost 600 doors in China currently closed. He reiterated that the company is estimating a first-quarter revenue impact to the APAC region of about $50 million to $60 million.
“From a supply chain point of view, there could be challenges that develop from the material, factory and logistics perspective,” he said. “In materials, we’re assessing possible impacts related to fabric trim and package sourcing, and potential delays and capacity challenges that could prove to be difficult in second half of the year.
“With respect to factories, we’re continuing to see closures, changing timelines of when they might reopen, and trying to assess what it means for production fulfillment, capacity and the prioritization of which products to make,” Frisk added. “In logistics, we think it’s reasonable to expect industry-wide delays in terms of delivery around the world, including potentially missed shipment and service windows and the need for increased air freight and additional measures at ports that could create unforeseen congestion.”
Frisk said the company’s international business should be up at a low double-digit rate in 2020 with each region also growing at a double-digit rate for the year. In Asia-Pacific, he said the strategy to expand and penetrate key markets is working.
“From a channel perspective, we are seeing outpaced e-commerce growth and plans to invest even more heavily into digital and marketing to continue to increase brand awareness and consumer engagement,” he said. “We also expect to continue to grow our owned and partner door base, which is now just over 900 locations across the region.”
In the North American business, a combination of demand challenges and distribution dynamics is materially impacting the business, he said. These issues are most evident in full-price wholesale and e-commerce, leading to an expected mid to the high-single-digit decline in 2020 for the North American business.
In wholesale, the ongoing move to reduce of sales to the off-price channel from its 2018 peak is on track, and while overall positive for the brand health and eventual supply demand rebalancing, Frisk said it “should remain a revenue headwind in 2020.”
“We’re working hard to support our key retail partners and believe the marketing efforts, assortment improvements and increased digital investments we’re making will enable us to better serve both our customers and consumers in our journey to returning to growth,” he said.
In addition, product development and marketing is ramping up. Frisk pointed to promising areas such as Rush and Recover, both activewear fabrics that help during and after physical activity; Iso-Chill, a mesh fabric that helps disperse body heat, making it feel cool to the touch and getting a big push in golf; and the Infinity Bra for active women.
In outerwear, Under Armour is focused on functional active styles such as IntelliKnit Sweaters, which Frisk said help to show consumers “how to run in something different than just a normal mid-layer.” Footwear innovations such as HOVR running are gaining traction, he added.
“So we’re also introducing these new ideas and new segments…into the performance world,” he added. “And the reality is a lot of that stuff looks so darn good, you’d want to wear it day to day…and I think that is kind of the way to think about what Under Armour is trying to do.”