Under Armour saw overall fourth-quarter sales dip 3 percent to $1.4 billion, but its continued focus on its owned sales channels—and ideally, a pivot to a more full-price sales model—may be able to breathe some life into the athleticwear and footwear brand.
The company’s revenue totals surpassed the $1.27 billion expected by Wall Street analysts polled by Refinitiv, while its adjusted earnings per share of 12 cents topped the anticipated per-share loss of 7 cents.
After a year that saw net losses reach $549.2 million, Under Armour ended 2020 with a holiday quarter profit of $184.4 million, with the company making plans to return to profitability in 2021.
In a Nutshell: As of Jan. 31, 2021, the majority of Under Armour’s supply chain and distribution network was operational, although the company has been experiencing some port congestion and container availability challenges, according to chief financial officer David Bergman.
Most the company’s global locations (both direct-to-consumer and mono-branded partner stores) were open, although not all are operating at full capacity due to various restrictions.
By region, approximately 95 percent of North American and Asia-Pacific stores were open, while approximately 70 percent of EMEA and Latin American stores were open.
Inventories totaled $896 million in the quarter, slightly up from $892 million to close out 2019. CEO and president Patrik Frisk said Under Armour plans to manage inventory more tightly in 2021 to encourage fuller-price selling across all distribution points, particularly as the company continues to further elevate its DTC-focused approach.
Gross margin was one of the Under Armour’s biggest success areas, increasing 210 basis points to 49.4 percent of total revenues compared to the prior year’s 47.3 percent margin rate. Excluding restructuring efforts, adjusted gross margin increased 300 basis points to 50.3 percent, driven primarily by benefits from its channel mix, supply chain initiatives and regional product mix.
Bergman noted that a lower portion of Under Armour business was sold within its distributor markets in the quarter, including lower third-party off-price sales, benefiting the company’s overall pricing strategy. Now, only 3 to 4 percent of Under Armour products are sold in off-price channels, Bergman said.
In line with the DTC push, Under Armour reaffirmed it would leave 2,000 to 3,000 of the more than 12,000 wholesale doors it currently occupies by 2022, indicating that the exit would begin in the back half of this year.
“We will continue to constrain demand in 2021,” Frisk said in the fourth-quarter earnings call Wednesday, acknowledging that it may impact the company’s top-line volume in the near term. “However, whether through proactive wholesale door reduction efforts in North America or ordering slightly less product against future demand based on the brand and margin benefits that we realized in 2020, we are confident that this focus will help elevate our premium positioning with consumers and therefore [drive] better profitability carrying forward into 2021.”
As uncertainty related to Covid-19 persists, Under Armour expects ongoing disruption to its business operations, potentially materially impacting results.
The company shared its full 2021 outlook amid the uncertainty, indicating that revenue is expected to improve at a high-single-digit percentage rate, reflecting a high single-digit growth rate in North America and a high-teens growth rate in the international business. Diluted loss per share is expected to be between 18 cents and 20 cents, and adjusted diluted earnings per share are expected to be in the range of 12 cents to 14 cents.
Additionally, operating income is expected to reach $5 million to $25 million, while adjusted operating income is expected to reach $130 million to $150 million when accounting for additional charges related to last year’s $550 million to $600 million restructuring plan in the first half of 2021.
Gross margin is expected to be up slightly versus the prior year adjusted gross margin rate of 48.6 with benefits from pricing and supply chain efficiency, being largely offset by the sale of MyFitnessPal, which was a high gross margin business.
Under Armour ended the year with cash and cash equivalents of $1.5 billion, including $199 million in net cash proceeds from the MyFitnessPal platform sale. No borrowings were outstanding under the company’s $1.1 billion revolving credit facility at the end of the fourth quarter.
Net sales: Fourth quarter revenue was down 3 percent to $1.4 billion, down from $1.44 billion the year prior. Wholesale revenue decreased 12 percent to $662 million, while direct-to-consumer revenue buoyed the company’s sales totals with an 11 percent bump to $655 million, driven by 25 percent e-commerce growth.
North America revenue decreased 6 percent to $924 million and international revenue increased 7 percent to $448 million (up 4 percent on a currency-neutral basis). The Asia-Pacific region carried the international business with a 26 percent sales increase (21 percent on a currency neutral) while Latin America saw a 2 percent jump (an 8 percent increase on a currency-neutral basis). The EMEA region is still lagging, down 11 percent in revenue (declining 14 percent on a currency-neutral basis).
Apparel revenue decreased 4 percent to $931 million, while footwear revenue declined 7 percent to $241 million. Accessories revenue increased 32 percent to $145 million, once again carried by its Sportsmasks for athletes.
Net earnings: Net income for the quarter was $184.4 million, putting Under Armour in a much healthier spot than the previous fourth quarter’s $15.3 million net loss. Adjusted net income was $55.8 million when excluding $50 million in interest and income tax expenses and $179 million in “other income” related to the sale of the MyFitnessPal platform.
Diluted earnings came in at 40 cents per share, while adjusted diluted earnings were 12 cents per share.
CEO’s Take: “What we’ll be left with when we’re through that journey [of exiting wholesale doors] is really what we believe are more appropriate doors for us,” Frisk said. “These are doors that we feel are going to win—a ‘win with the winners’ kind of mentality—and where we also feel that we can earn shelf space back. That’s really important for us. It’s also important for our segmentation and our merchandising strategy going forward.”