Under Armour saw revenue increase 9 percent to $1.53 billion, and improve 8 percent on a currency-neutral basis, compared to the 2020 fourth quarter on net income of $110 million.
Despite the earnings and sales beat, the athleticwear and footwear retailer’s stock dropped 7 percent in early Friday morning trading after what execs called 10 percentage points of upcoming revenue headwinds due to the current supply chain constraints.
In a Nutshell: Apparel revenue increased 18 percent to $1.1 billion from $931 million in the year-ago quarter, while footwear revenue jumped 17 percent to $283 million from $241 billion. Accessories revenue decreased 27 percent to $107 million from $145 million.
As announced in February 2021, Under Armour is changing its fiscal year ending from Dec. 31 to March 31. Following a three-month transition period from Jan. 1 to March 31, Under Armour’s fiscal year 2023 will run from April 1, 2022, through March 31, 2023. Consequently, there will be no fiscal year 2022.
The retailer shared its outlook for the current transition quarter ending March 31, 2022, comparing it to the first calendar quarter of fiscal 2021.
Revenue is expected to increase at a mid-single-digit rate compared to the previous expectation of a low single-digit rate increase. This expectation includes the approximately 10 percentage points of headwinds related to reductions in the spring-summer 2022 order book based on supply constraints associated with ongoing Covid-19 pandemic impacts.
Gross margin is expected to be down 200 basis points compared to the prior year period’s adjusted gross margin. This expectation includes approximately 240 basis points of negative impact due to higher freight expenses and an unfavorable sales mix, partially offset by pricing benefits.
Operating income is expected to reach approximately $30 million to $35 million, on diluted earnings per share between 2 cents and 3 cents.
Under Armour said it will provide a more detailed outlook for its upcoming fiscal year in May.
The company expects to ship more product using air freight in this transition quarter and also in the first two quarters of fiscal 2023, according to Under Armour chief financial officer David Bergman.
“We don’t do not anticipate to have to use a lot of air freight in the back half of fiscal 2023,” Bergman said. “We believe that air freight costs could actually become a tailwind for us in the back half, whereas it would continue to probably be a headwind for us in the front half. And then relative to ocean freight rates, that’s also been a developing cost increase as well. That one’s probably going to take a little bit longer to subside.”
Looking back at the fourth quarter results, inventory was down 9 percent to $811 million from the $896 million in inventory held in the 2020 final period.
Bergman said Under Armour is “very comfortable” with its inventory mix even amid the heightened product demand, noting that the business has been able to leverage its off-price channel and factory houses to better navigate the current situation.
“The inventory that we’re running now is very well managed,” Bergman said. “We’re excited about where we’re able to end the year. But we’re not at a point where we feel like we’re leaving sales off the table. We’ve had to cancel a lot of purchase orders, which we’ve mentioned because of the supply chain constraints. Outside of that, we feel like the operating model is working. And therefore as we get past kind of the speed bumps with the supply chain challenges, we believe that we’re going to be able to continue to grow that top line and continue to manage inventory tightly. And we’re excited about being able to do that and what that means for continued free cash flow going forward.”
Like many of its retail counterparts, Under Armour expects to raise prices on select items, according to president and CEO Patrik Frisk. He didn’t comment on which categories or products would see higher prices.
“We will be raising some prices here in 2022, and it’s really about a continuation of our pricing strategy,” Frisk said. “As the brand gets stronger as the market continues to evolve and the conditions evolve, we’re definitely looking at, optimistically, raising prices where we can, but it’s going to be more surgical in nature versus an across-the-board approach.”
Gross margin increased 130 basis points to 50.7 percent compared to the prior year’s 49.4 percent, driven by benefits from pricing and restructuring charges in the prior year. The margin increase was offset by elevated freight expenses, the absence of the MyFitnessPal app Under Armour sold in October 2020 and an unfavorable product mix.
Cash and cash equivalents were $1.7 billion at the end of the quarter, and no borrowings were outstanding under the company’s $1.1 billion revolving credit facility.
Last quarter, Under Armour narrowed its 2020 restructuring plan cost range to $525 million to $550 million from the prior $550 million to $600 million range estimate. The company currently expects to recognize any remaining charges related to this plan by the end of the first quarter of its fiscal year 2023.
Net Sales: Under Armour’s fourth quarter revenue was up 9 percent to $1.5 billion from the $1.4 billion taken in in the 2020 holiday period, and up 8 percent on a currency-neutral basis. For the full year, revenue was up 27 percent to $5.7 billion from last year’s $4.5 billion, and up 25 percent on a currency-neutral basis.
Wholesale revenue increased 16 percent to $768 million and direct-to-consumer revenue increased 10 percent to $720 million. E-commerce sales rose 4 percent, which represented 42 percent of the total direct-to-consumer business during the quarter.
North America revenue increased 15 percent to $1.1 billion and international revenue increased 3 percent to $461 million, or up 2 percent on a currency-neutral basis. Within the international business, revenue increased 24 percent in EMEA (up 23 percent currency neutral), decreased 6 percent in Asia-Pacific (down 7 percent currency neutral), and decreased 22 percent in Latin America (down 23 percent currency neutral).
Net Earnings: Fourth-quarter net income was $110 million on diluted earnings per share of 23 cents. Adjusted net income was $67 million on adjusted diluted earnings per share of 14 cents. Net income was down from the $184 million generated in last year’s fourth quarter.
Operating income was $86 million, with adjusted operating income coming in at $100 million.
For the full year, net income was $360 million, with diluted earnings per share coming in at 77 cents. Adjusted net income was $397 million, with adjusted diluted earnings per share of 85 cents.
CEO‘s Take: “The health of our growth right now is dramatically different than where we were in 2018-2019 in terms of the composition of the revenue,” Frisk said. “There’s significantly fewer off-price sales, and reduced discounting, markdowns and promotion in all of our channels. The type of inventory management that we have has subsequently developed much better turn in both our own as well as our wholesale partners. The fact that we’ve exited about 2,500 doors that we felt were undifferentiated—and we’re still growing in spite of that—just shows the type of trajectory that we’re expecting going forward. At this point in time, we’re continuing to earn back shelf space.”