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Supply Side Improvements Help Under Armour’s Q1, But North American Sales Still Disappoint

Sales of running shoes and international business growth helped Under Armour Inc. turn the corner on first-quarter earnings results, as did a reduction in inventory levels. But declining North American sales remain a concern.

In a Nutshell: Under Armour had what appeared to be a good first quarter, swinging to the black from the year-ago loss and besting Wall Street’s expectations. And while gains in footwear sales and its international businesses contributed to the topline, the company on Thursday reported on other improvements that flowed down to the bottomline.

Gross margin rose 100 basis points to 45.2 percent from the year-ago quarter. That was accomplished in part through product cost improvements, regional mix and prior period restructuring charges. The company was also able to lower selling, general and administrative expenses by 1 percent to $510 million. Total debt was down 36 percent to $590 million, while cash and cash equivalents rose 2 percent to $289 million. In addition, inventory was down 24 percent to $875 million.

Mike Zuccaro, analyst at credit ratings firm Moody’s Investors Service, said the inventory reduction “should allow the company to focus more on its innovative new product introductions and premium positioning going forward.” The analyst said the quarter’s “results demonstrate continued progress in its multi-year turnaround efforts,” even though some challenges remain, and that Under Armour is still on track for improvement in 2019. One of those challenges is the 3 percent decline in North American sales, a key market for the company.

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Looking ahead, Kevin Plank, the branded performance athletic apparel firm’s chairman and chief executive officer, said, “As we execute against our long-term plan, Under Armour will emerge from 2019 and our ‘Protect This House’ chapter as an even stronger brand and company.”

Sales: Revenues for the first quarter ended March 31 saw revenues rise 1.6 percent to $1.20 billion from $1.19 billion.

The increase was due in part to footwear sales, driven by strength in its run category. The company said footwear revenues rose 8 percent to $293 million. In contrast, apparel revenues rose just 1 percent to $775 million. Wholesale revenues rose 5 percent to $818 million in the quarter, although direct-to-consumer sales fell 6 percent to $331 million as the company shifted to more premium, full-price sales.

The highlight in the quarter was its growing international businesses, which rose 12 percent to $328 million. Within the sector, revenue was up 3 percent in the Europe, Middle East and Africa regions, up 25 percent in Asia-Pacific and up 6 percent in Latin America. In contrast, North American sales fell 3 percent to $843 million.

Earnings: Net income was $22.5 million, or 5 cents a diluted share, against a net loss of $30.2 million, or 7 cents, in the year-ago quarter. Wall Street was expecting earnings per share at 0 cents on revenues of $1.19 billion.

The company guided earnings per share for Fiscal 2019 to between 33 cents to 34 cents, up from prior forecasts of 31 cents to 33 cents. Revenues are expected to be up 3 percent to 4 percent, reflecting flat results for North America and a low double-digit percentage rate increase for its international business.

CEO’s Take: According to Plank, “Our first quarter results demonstrate our unwavering commitment to protecting and growing our premium performance athletic brand through a disciplined go-to-market process that delivers innovative products and experiences to make athletes better.”