Under Armour had an unexpected win Wednesday when it reported higher-than-expected earnings in the third quarter and raised its full-year projections.
Although the company’s stock got a boost, hitting a nine-month high early in the day, the brand’s aggressive promotional stance and its high inventory levels gave some analysts the jitters.
Zachary Warring, equity analyst at CFRA Research, retained his “sell” rating on the company even though he raised his 12-month target by $1 to $6 and maintained his earnings per share estimates for fiscal year 2022 and fiscal year 2023 of 45 cents and 55 cents, respectively. He said the company is still performing “well below competitors Nike and Lululemon,” and warned that since inventory levels are up 50 percent year-over-year to $1.2 billion, he expects prolonged promotional activity and pressured margins this year.
Related Galleries
Sharon Zackfia of William Blair was more bullish on the brand. Although she too pointed to the higher inventory levels that impacted gross margins, as well as unfavorable currency trends, she wrote: “We remain optimistic that the repositioning of Under Armour’s brand has set the stage for meaningful and consistent revenue growth alongside ongoing margin expansion once the macro situation normalizes, and reiterate our ‘outperform’ rating. Risks include Under Armour’s ability to maintain and evolve a strong brand image and product portfolio in an industry with intense competition, historically high turnover rates in senior management, and majority voting control held by executive chairman and brand chief Kevin Plank.”
Net income for the quarter ended Dec. 31 rose to $121.6 million, or 27 cents a share, from $109.7 million, or 23 cents a share, in the year-ago period.
Overall sales rose 3.4 percent to $1.58 billion thanks to 14 percent gain in international revenue that offset the 2 percent decline in North America. EMEA was a standout region for the company with revenue up 32 percent to $265 million in the period, and Latin America was also strong with sales up 45 percent to $64 million. The APAC region, however, was down 9 percent to $198 million due mainly to the ongoing COVID-19 challenges in the region.
Wholesale revenue was up 7 percent to $820 million while direct-to-consumer sales fell 1 percent to $715 million due to a 6 percent drop in the company’s owned and operated stores. E-commerce sales, however, increased 7 percent and now represent 45 percent of d-to-c sales.
By category, apparel sales dipped 2 percent to $1 billion while footwear revenue was up 25 percent to $354 million. Sales of accessories declined 2 percent to $105 million. In the apparel category, golf and team sports did well while the training area was soft and the Unstoppable pants and outerwear were also solid performers. In footwear, the HOVR Machina 3 and the other running shoes were popular, as were the Curry 10 basketball shoe and football cleats.
Colin Browne, Under Armour’s interim president and chief executive officer, stressed that although inventory levels were 50 percent higher in the quarter, this is up against a lean inventory level in fiscal 2021 due to supply chain disruptions. He said inventory levels are expected to peak by the end of the fiscal year and then fall in the following quarters.
In response to an analyst’s query, he admitted that the sports apparel market is “bloated” right now because of the amount of inventory that has hit the market in the past six months. But from an Under Armour perspective: “We’re actually reasonably happy because we were running the constrained model last year. We also walked away from some demand because we just couldn’t see we’d be able to service it. So our inventory levels were incredibly slim last year. We’re now getting our inventory back to what I would call a steady state number. That 50 percent increase is a big number, we’re holding the right level of inventory for a $6 billion business. We’re comfortable where we are from an inventory perspective. And our inventory is rightsized for the way in which we expect our business to evolve next year.”
Browne pointed to the addition later this month of Stephanie Linnartz, who will take the reins as president and CEO, saying she will “advance our strategic consumer and product refinements further — leveraging Under Armour’s strong brand to drive sustainable, profitable growth.”
As reported, right before Christmas, Under Armour reached outside its four walls to name Marriott International president Linnartz to the top post. She will join the company on Feb. 27. Linnartz takes the spot that was vacated when Patrik Frisk stepped down in June. Since then, Browne had been leading the business and upon her arrival, he will return to his post as chief operating officer.
In its call with analysts Wednesday morning, Plank said the company is “working hard to amplify opportunities for our existing core business while strengthening our long-term ability to serve athletes beyond the gym, field and courts, and throughout the entirety of their day.”
He said Under Armour continues to make progress on “broadening our product aperture to address the non-active moments of an athlete’s day” and to more effectively target the 16- to 20-year-old varsity athlete.
In his remarks, Browne echoed those sentiments and said that the company has “earned our reputation as a trusted brand for sport,” but by homing in on the rest of their day, it represents “a significant long-term growth opportunity that triples the addressable market for Under Armour.”
This reflects an about-face from Frisk’s mission, which was to focus completely on the athletic part of the business. But Browne said the new focus is to offer performance products with style or “science wrapped in art.” In October, Under Armour soft-launched the SlipSpeed, a training shoe with a convertible heel that allows wearers to switch between active and recovery modes, he said. He said the shoe falls in “the space between moments of style and self-expression.” It launches globally on Feb. 14 and is the first product in a larger “hybrid platform,” he said.
The shoe will be showcased in a pop-up store in New York City’s Flatiron District, along with the complementary apparel in a newly imagined retail concept that features “less product density and enhanced storytelling.” The apparel includes structured wovens, new iterations of the Unstoppable men’s and women’s bottoms, performance T-shirts and sports bras. But Browne said the bulk of the lifestyle product will make its appearance for fiscal 2025 and beyond.
The company is also evolving its marketing efforts, he said, to better connect with the younger athlete. That includes an enhanced social media presence centered around more culturally relevant issues.
As a result of the strong showing in the quarter, Under Armour raised its outlook for fiscal 2023 and is now projecting earnings per share of 52 to 56 cents a share, up from 44 cents to 48 cents. Sales are still expected to be in the low-single-digit range and operating income also remains unchanged at $270 million to $290 million projected.
On a down day in the market, the stock closed at $9.99, down 91 cents, or 8.4 percent.