Under Armour

Under Armour Inc.’s stock fell sharply after the company failed to impress investors in the first leg of its comeback strategy — and signaled it was reconsidering plans for a new home on Fifth Avenue. 

Shares plunged 18.9 percent to $16.59 Tuesday after the Baltimore-based athletic apparel, accessories and footwear brand reported weaker-than-expected quarterly earnings.

Under Armour is an operationally better company following our transformation over the past few years, with a clearly defined and focused strategy, enhanced go-to-market process, cleaner inventories and a stronger balance sheet,” said Patrik Frisk, Under Armour’s president and chief executive officer. “Ongoing demand challenges and the need to drive greater efficiencies in our business requires us to further prioritize our investments to put our company in the best position possible to achieve sustainable, profitable growth over the long-term.”

The company said it was reexamining its plans for its flagship on New York’s Fifth Avenue in order to curb expenses.

The planned New York flagship, a 53,000-square-foot store set to open in the former FAO Schwarz space at 59th Street and Fifth Avenue in Manhattan, has been in the works since 2016. But executives on a conference call with analysts said the company is considering a restructuring plan — one that could ditch the store.

“Flagship retail is certainly important to us, but in this instance, we would prefer to continue focusing on our smaller, more profitable Brand House commercial concepts…we’re rolling out this year,” said David Bergman, Under Armour’s chief financial officer.

Under Armour would still be liable for the terms of the lease, but Bergman said the company would consider subletting the space. If the retailer did abandon the store, it would lead to pretax restructuring changes of $225 million and $250 million, which would be part of a larger restructuring program that could lead to charges of up to $425 million.

If implemented, the restructuring initiatives could drive between $30 million and $50 million in pre-tax benefits for fiscal year 2020.

Bergman was quick to add that the company has not yet made a final decision on the fate of the store, which is subject to a review by Under Armour’s board. Even so, Frisk said only moments later that it was “prudent to take this action at this time. We have other flagship stores around the world and we’ll continue to look at that flagship’s opportunity in the future for sure.”

Meanwhile, Under Armour is still on track to open between 1,500 and 1,700 stores around the world in the next three to four years.

But results from the quarter highlighted just how far Under Armour still has to go.

For the three-month period ending Dec. 31, revenues rose about 4 percent to $1.44 billion, up from $1.38 billion during 2018’s fourth quarter. But the company had a loss of $15.3 million, compared with profits of $4.2 million the same time last year. Under Armour credited this to a $23 million tax expense, as well as a $39 million impairment charge on an equity investment Under Armour has in Japan

Revenues for all of 2019 were $5.26 billion, compared with $5.19 billion in 2018. Meanwhile, profits were $92.1 million, compared with a loss of $46.3 million in 2018. 

Moving forward, the company anticipates even further losses, most notably because of the ongoing coronavirus in China. The retailer expects sales declines between $50 million and $60 million for 2020’s first quarter.

That’s just more trouble for the company.

“I’m not satisfied with where we are today,” Frisk said on the call. “We absolutely have more work to do. To execute this kind of restructuring strategy takes time.”  

While Under Armour expects continued declines in its wholesale division — in the low-single digits — it anticipates similar gains in its direct-to-consumer business and will continue to invest in digital and marketing as a result.

“Our e-commerce platform is an ailing and old one,” Frisk said. “We have plans to move onto a new one in [the second half of] 2020. The difference is, we’re not just doing the product better, but we’re doing the messaging better.”

But a reduction in sales in the off-price channel, as well as less promotional activity in the back half of the year could cause further declines in revenue.

Frisk said this is an important move in repositioning Under Armour as a premium brand in the eyes of consumers, especially in North America, but Wall Street remains skeptical on the company.

“It is growing increasingly clear [Under Armour] is no longer a growth story,” said Simeon Siegel, retail analyst at BMO Capital Markets. “We worry this may not be a sufficient reset and [Under Armour] may see the worst of both worlds: revenue reductions without margin lifts from a deep/swift cut. “ 

He reiterated his firm’s “underperform” rating on the stock.

Even so, footwear continues to be a growth driver for the company. And while executives expect apparel and accessories to be down for the year, there were a few bright spots including the brand’s upcoming sports bras and fleece for both men and women.

It was a tough start for Frisk, who took the reins as ceo last month.

In October, Under Armour founder and former ceo Kevin Plank said he would transition to executive chairman and brand chief. Other c-suite changes include Colin Browne, appointed chief operating officer earlier this month, and Paul Fipps named chief experience officer, a new position for the company. 

Other headwinds persist for the firm, which continues to be plagued by an ongoing SEC security probe and heightened competition in the world of ath-leisure and activewear

“The brand remains focused on the technical aspect of their apparel,” said Jane Hali & Associates in an analysis. “[Under Armour] is focused on functionality rather than trends in the active and ath-leisure space. The brand does not have many collaborations with trending celebrities or brands that would help them gain. We are yet to hear news on an impressive business strategy that would help [the company] gain share in the activewear market.”

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