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Under Armour Warns of ‘Very Fluid Situation’ in Vietnam

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Under Armour saw revenue climb 91 percent in its second quarter to $1.35 billion from $707.6 million a year earlier, beating the $1.21 billion estimate from analysts at Refinitiv.

The athleticwear and footwear brand swung to a profit of $59.2 million, or 13 cents per share, from a loss of $182.9 million, or 40 cents per share, a year earlier. With the solid second quarter, Under Armour raised its 2021 forecast for revenue, earnings per share and gross margin.

In a Nutshell: As Under Armour further pivots to direct channels and continues exiting 2,000 to 3,000 wholesale outlets, it is sharpening its focus on full-price sales at own brick-and-mortar and online locations.

All major categories saw significant growth: Apparel revenue increased 105 percent to $874 million, footwear revenue rose 85 percent to $343 million and accessories revenue climbed 99 percent to $112 million. 

The Covid-19 pandemic is still lingering across Under Armour’s supply chain, a problem when approximately one-third of the brand’s footwear and apparel product is sourced from Vietnam, CEO Patrik Frisk said in an earnings call.

“Currently, we have experienced some things happening already from Vietnam in terms of impact not just on the actual manufacturing, but also to the logistics and some port congestion and container availability,” Frisk said. “We’re monitoring it, and as you know, it’s a very fluid situation right now in terms of what’s currently going on and how that thing is spreading.”

Under Armour was mum on how much longer lead times out of Southeast Asia have become, but Frisk pointed to the “well-balanced sourcing platform” across Europe, the Middle East, South America and Latin America as the reason the brand is in a better position than others might be.

Chief financial officer David Bergman confirmed that the company was seeing delays due the general supply chain pressures. “We are seeing a little bit of delays in some of our products and that could lead to some cancellations here and there and other pressure points,” he said.

Inventories decreased 26.5 percent on a year-over-year basis, to $881 million from $1.2 billion. The major drop is what Bergman referred to as “demand constraints” that started last year as part of the exit of non-premium wholesale partners. Bergman expects the impact of the demand constraint to be bigger in the second half of the year.

Gross margin increased 20 basis points (2 percentage points) to 49.5 percent compared to the prior year. Margin was driven primarily by benefits from pricing and changes in foreign currency, and was offset by channel mix and last year’s sale of MyFitnessPal, which carried a higher gross margin rate.

Cash and cash equivalents were $1.3 billion at the end of the quarter, and no borrowings were outstanding under the company’s $1.1 billion revolving credit facility.

For the full year, Under Armour revenue is now expected to be up at a “low-twenties” percentage rate compared to the previous expectation of a “high-teens” percentage rate increase, reflecting a “low-twenties” percentage growth rate in North America and a “mid-thirties” percentage growth rate in the international business.

Gross margin is expected to increase 50 to 70 basis points (0.5 to 0.7 percentage points) compared to the previous expectation of an approximate 50-basis-point (0.5-percentage-point) improvement versus the prior year adjusted gross margin of 48.6 percent. Benefits from pricing and changes in foreign currency are expected to be offset by the sale of the MyFitnessPal platform and expected higher freight expenses.

Operating income is expected to reach $215 million to $225 million, well ahead of the previous range of $105 million to $115 million. Excluding the impact of restructuring efforts, adjusted operating income is expected to reach $340 million to $350 million compared to the previous expectation of $230 million to $240 million.

Diluted earnings per share are expected to be 14 cents to 16 cents compared to the previous expectation of a diluted loss per share of 2 cents to 4 cents. Adjusted diluted earnings per share are expected to reach 50 cents to 52 cents, up from the previously expected range of 28 cents to 30 cents per share. 

Net Sales: Second-quarter revenue improved 91 percent to $1.4 billion, and was up 85 percent on a currency-neutral basis compared to the prior year.

Wholesale revenue increased 157 percent to $768 million and direct-to-consumer revenue increased 52 percent to $561 million, driven by strong growth in owned and operated stores and offset by an 18 percent decline in e-commerce, which represented 39 percent of the total direct-to-consumer business.

North America revenue increased 101 percent to $905 million and international revenue increased 100 percent to $446 million, up 84 percent on a currency-neutral basis. Within the international business, revenue increased 133 percent in EMEA (up 116 percent currency-neutral), increased 56 percent in Asia-Pacific (up 43 percent currency-neutral) and skyrocketed 317 percent in Latin America (up 284 percent currency-neutral). 

Net Earnings: Net income at Under Armour was $59.2 million, up from the $182.9 million loss in the year ago period. Including impacts of restructuring charges and taxes, adjusted net income was $110 million.

Diluted earnings per share were 13 cents, a turnaround from the 40-cent-loss per share in the prior-year quarter. Adjusted diluted earnings per share was 24 cents.

Operating income was $121.2 million, above the $169.6 million loss in the year-ago period. Adjusted operating income was $124 million. 

CEO’s Take: Frisk is upbeat about Under Armour’s pricing power amid the brand’s channel shift.

“We’re able to sell more full-price product at lower discounts and our gross to net is continuing to improve,” Frisk said. “And you see that coming through in the gross margin. I think in the future though, as you think about that into 2022 and beyond, there’s certainly opportunity for us to have some power in terms of the brand continuing to improve to also raise prices. We’ll do that as we always try to, and I think we’ll have more opportunity now as we become stronger as a brand.”

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