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Under Armour Eyes $300 Billion Market Opportunity

Under Armour is tightening its focus on high school and young college-age athletes. The challenger to Adidas and Nike says it’s working to serve the 16-to-20-year-old athlete, which could help the brand regain popularity with teens after failing to rank with them on Piper Sandler’s spring and fall surveys this year.

Under Armour saw second-quarter net revenue growth of 1.8 percent to $1.57 billion—or 4.9 percent on a currency-neutral basis—with $86.9 million in net income.

Despite another downward revision of its full-year guidance, the Baltimore athleticwear company saw its stock closed up nearly 12 percent Thursday as net revenue and earnings per share both surpassed estimates from analysts polled by Refinitiv.

In a second-quarter earnings call, interim CEO and president Colin Browne identified casual wear as a key to the future of the Under Armour brand that could triple the company’s potential addressable market size to $300 billion.

In a Nutshell: For the full 2023 fiscal year, Under Armour now expects revenue to grow at a low single-digit percentage rate, compared to prior expectations of 5 to 7 percent growth. The revision is due primarily to a more challenging retail environment and additional negative impacts from changes in foreign currency. Currency-neutral revenue is expected to be up at a mid-single-digit percentage rate compared to the previous expectation of 7 to 9 percent growth.

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Diluted earnings per share is now expected to be 56 cents to 60 cents compared to the previous expectation of 61 cents to 67 cents. Adjusted diluted earnings per share is now anticipated to range between 44 cents to 48 cents, down from prior forecasts of 47 cents to 53 cents.

“As we saw through Q2 from an average sales price (ASP) perspective, our ASP’s globally were slightly down, but really not very much,” said David Bergman, chief financial officer at Under Armour in the call. “They were down a little bit in North America and APAC where there’s been a little bit more discounting in the market right now—they were actually a little bit up in in EMEA. There’s definitely a mix shift for us though, with the higher growth in footwear that absolutely helps us out.”

Footwear was the standout sector for Under Armour, driving 14 percent revenue gains to $375.9 million from $329.7 million a year ago. Apparel revenue decreased 1.9 percent to $1.04 billion from $1.06 billion in the prior-year quarter. Accessories revenue fell 12.1 percent to $111.1 million from $126.3 million.

For the second half, Bergman said he expects higher discounting and promotional activities to remain high due to market conditions, but that the company “expects to hold the line there and not go deeper than 2019 and prior.”

Under Armour continues to innovate within its product line amid the updated outlook and heightened promotional level, with recent releases including the no-shoelace performance sneaker UA SlipSpeed and the Curry Flow 10, the 10th basketball sneaker for NBA superstar Stephen Curry with the athleticwear company.

In creating the UA SlipSpeed heel folding technology, Under Armour wanted to create a comfortable underfoot experience without compromising performance capabilities. This sneaker includes the Boa Fit System, allowing wearers to turn a dial to secure their foot or release the tension.

The Curry Flow 10 includes the company’s UA Warp upper technology, which offers enhanced comfort and control throughout dynamic basketball movements. Additionally, it leverages the super-light UA Flow cushioning technology, and the durable UA Flow outsole to aid basketball players with on-court agility.

The UA SlipSpeed launched in the U.S. on Oct. 31 at $150 a pair, with limited availability on UA.com and via Dick’s Sporting Goods. And the new Curry Brand shoe debuted under its first colorway “Iron Sharpens Iron” on Oct. 21 on Currybrand.com for $160.

Company inventory was up 29 percent to $1.08 billion as of Sept. 30, increasing from $837.7 million in the year-ago period.

“The last two years have had us in a defensive position concerning inventory that also left us with more out of stock than optimal to serve our business,” said Browne in the call. “As inventory approaches a more appropriate level for our size, and with the composition of this inventory being mostly current not aged, we feel confident in how we are managing this aspect of our business.”

Gross margin declined 560 basis points (5.6 percentage points) to 45.4 percent compared to the prior year, driven primarily by higher promotions, elevated freight expenses related to Covid-19 supply chain impacts, an unfavorable channel mix and the negative impact of foreign currency changes.

Bergman did share some positive news on product mix, saying that the margin gap between footwear and apparel is getting “smaller and smaller as we build more scale in footwear and continue to get better in our design and overall efficiency.”

The company said it expects gross margins to fall 550-to-600 basis points (5.5-to-6 percentage points) in the third quarter due to more promotions and the hit from a stronger dollar. Fourth-quarter gross margins are forecast to decline 100-to-150 basis points (1-to-1.5 basis points).

Cash and cash equivalents were $853.6 million at the end of the quarter, and no borrowings were outstanding under the company’s $1.1 billion revolving credit facility.

Net Revenue: Net revenue for the second quarter was up 1.8 percent to $1.57 billion (up 4.9 percent currency-neutral) compared to the prior year’s $1.55 billion.

Wholesale revenue increased 4.1 percent to $948.2 million from $910.7 million, and direct-to-consumer revenue decreased 4.1 percent to $577.1 million from $603.6 million due to a 9 percent decline in owned and operated store revenue, which was partially offset by a 4 percent increase in e-commerce revenue.

E-commerce revenue represented 36 percent of the total direct-to-consumer business during the quarter.

North American revenue was down 2.3 percent compared to the prior year at $1.01 billion, and international revenue increased 7.3 percent to $547 million (up 15.8 percent currency neutral). Within the international business, revenue increased 9 percent in EMEA (up 20 percent currency neutral), rose 7 percent in Asia-Pacific (up 14 percent currency neutral), and increased 3 percent in Latin America (up 4 percent currency neutral).

Net Earnings: Second-quarter net income was $86.9 million, down from last year’s $94.6 million in net income. Excluding a $10 million legal expense related to ongoing litigation matters and a $5 million benefit from a tax valuation allowance release related to prior-period restructuring, adjusted net income was $92 million.

Diluted earnings per share was 19 cents, while adjusted diluted earnings per share was 20 cents. These are both slight decreases from the year-ago period’s diluted earnings per share of 20 cents and the adjusted diluted earnings per share of 23 cents.

Operating income was $119.4 million, while adjusted operating income was $129.4 million when accounting for the legal expense. In the year-ago period, operating income totaled $153.9 million while adjusted operating income was $173.9 million.

CEO’s Take: Browne said Under Armour’s total addressable market nearly triples to $300 billion when accounting for the growth of casual wear, which is the brand’s next phase of product broadening “beyond the fields, courts and gyms.”

As such, Under Armour has added a “Live” component to its core “Train, Compete, Recover” strategy, with the company expecting to significantly expand its casual wear product offerings in fiscal 2024.

“[Train, compete, recover] only probably encompasses probably 20 percent to 30 percent of their day, so the opportunity of leaning into the other 70 percent of their day is clearly a huge opportunity there. When we talk to athletes as well, it’s clear that they want to have access to our product, or they want to feel comfortable to wear our product as they’re traveling to the the core field or pitch. The opportunity for us to lean into that it feels [like] open door for us. We need to do a better job of working through how we execute against that.”

Founder and executive chair Kevin Plank said the company is on track to announce a permanent CEO before the end of the fiscal year. Former CEO Patrik Frisk exited the role on June 1.