Kevin Plank held his first Wall Street pep rally in three years on Wednesday — but investors were looking for a lot more.
Shares of Under Armour Inc. dropped 8.9 percent to $19.01 after the activewear brand’s founder and chief executive officer walked analysts through the company’s plans for the next few years and laid out financial goals.
The daylong investor meeting was a chance for the company to shift focus toward its comeback plan and away from the roiling controversy stemming from revelations that, until recently, Under Armour executives were permitted to expense strip club visits. It is the kind of story that reinforced the testosterone-fueled vibe that has followed the brand and hasn’t played well in the #MeToo era (and a culture that Plank didn’t even address in his remarks to analysts).
But Plank made clear the whole company is working hard to get back on track.
The sports-minded founder’s enthusiasm was juxtaposed against the operational expertise of new president and chief operating officer Patrik Frisk. The two have worked together for the past 18 months to guide the Baltimore-based brand through a prolonged rough patch as it seeks to transition from a precocious upstart — albeit an almost $5 billion one — to a global sports powerhouse.
Plank, Frisk and the company’s senior management team laid out the company’s new strategic five-year growth plan, which calls for improvement across many fronts. And there are some green shoots already, even as Wall Street wanted them to grow faster.
While Under Armour is still struggling, the trend lines are modestly improving. The company said that its operating loss is now expected to be about $40 million to $55 million this year versus the previously expected $50 million to $55 million. On an adjusted basis, operating income is now expected to reach $160 million to $165 million versus the previous $150 million to $165 million range.
Excluding the impact of the restructuring efforts, adjusted diluted earnings per share are now expected to be 21 to 22 cents versus the previous expectation of 19 to 22 cents.
Still, there is a long road ahead to get back to the kind of skyrocketing growth the brand saw only a few years ago. Revenue isn’t projected to return to a low double-digit growth rate until 2023, inclusive of a mid- to high single-digit five-year compounded annual growth rate that is expected to be driven primarily by the company’s international and direct-to-consumer businesses.
Earnings per share are expected to grow at a five-year compound annual growth rate of about 40 percent.
The hard-charging Plank opened the meeting by admitting that after 26 consecutive quarters of 20 percent or more growth, Under Armour began to stumble by getting too big too fast. He said that as the corporation expanded product categories and moved outside of the U.S., the corporation “lost focus” on “keeping the business simple.” He said that by the end of 2016, the corporation had reached “an inflection point” and it needed to regroup to address its rapid expansion.
Under pressure from Wall Street, Plank somewhat loosened his management control and Under Armour brought Frisk on board in the summer of 2017 to spearhead a $200 million, three-year restructuring program to re-engineer and streamline the business.
In order to get back on track, Under Armour will depend more on data and less on “gut” as it works to gain a larger share of the $92 billion athletic apparel and footwear market of its target consumer. The entire market represents $280 billion but Under Armour is focused on the competitive and weekend warrior athlete.
“That’s a lot of runway for a brand at $5 billion,” said Frisk.
Plank said Wednesday that the company is in better shape in part because it has reduced its product offering to eliminate redundancies, upgraded its systems and has a better handle on what its consumer wants from the company. Its mission is to provide products customers didn’t know they wanted and then realize they can’t live without, he said.
“It’s not a God-given right that we get to exist,” Plank said. “We have to earn that every day.”
Frisk said the goal is to “correlate innovation with commercialization.” And to achieve that, the company needs to be “laser-focused on execution” in 2019 and beyond.
Under Armour recently gained a lot of consumer insight by surveying 22,000 shoppers in the U.S., Europe and China and identified its target as the “focused performer,” or the person who is athletically oriented but has a complete life that revolves around things other than sports.
This consumer is also changing rapidly and to address this, Under Armour’s product development team is working quicker, with lead times dropping from 22 months to 17. This will make the company more profitable, Frisk said.
Looking ahead to 2023, he said the focus will be on being “consumer-centric,” strategically aligned and balanced, structurally sound, more predictive and better tuned into the international market — strategies that will ultimately drive better financial performance.
While international — notably Asia Pacific and Europe — are seen as major opportunities, North America continues to represent the bulk of the company’s business.
Here, Under Armour’s strategic plan to gain a larger share of the $95 billion athletic apparel and footwear market includes reducing promotions and elevating the brand to a more-premium position once again. That’s not to say that it will move away from its good-better-best strategy, but in each channel, it will be the premium offering. In fact, the company has cut one-third of the promotional events in North America compared with 2017, a trend that it sees continuing.
The company is expecting footwear to outpace apparel in the near future and women’s wear to be a growth driver. Apparel currently accounts for 71 percent of North American revenues and footwear is 21 percent. By 2023, footwear is seen inching up to 22 percent of sales with a 3 to 5 percent annual growth rate, while apparel is seen either flat or up 2 percent in that time frame, according to Jason LaRose, president of North America.
Direct-to-consumer retail is also expected to grow over the next five years, he said. The company operates 180 stores in North America, representing 26 percent of sales. Digital retail is at 12 percent. By 2023, he said, both those channels are projected to grow by 3 to 5 percent a year and represent 28 percent and 15 percent of sales, respectively, he said.
That includes the company’s planned flagship on 59th Street and Fifth Avenue in New York City in the former FAO Schwarz space. Plank said that location “is going to be amazing.” The plan is for Under Armour to take possession of the space in the first half of 2020 and open in the first half of 2021.
Turning to international, Massimo Baratto, managing director of Europe, the Middle East and Africa, said the company is now in 57 markets, with its largest presence in the United Kingdom. It operates 130 retail doors in the region.
The $75 billion market for athletic apparel and footwear market there is growing at a low-single digit rate and Under Armour sees growth in its training, running, women’s and footwear categories, he said.
The growth there is significantly higher than in North America with retail seen growing from 9 percent of sales to 15 percent of sales — with annual growth of 22 to 24 percent — between now and 2023, and digital retail increasing from 7 percent to 10 percent of sales and posting a 20 to 22 percent annual growth rate. Wholesale, while still growing at 10 to 12 percent annually over that period, is seen dropping from 84 percent of the total to 75 percent by 2023.
In Latin America, according to Manuel Ovalle, managing director of the region, the company operates in 38 markets and has 75 retail doors. It is expecting low double-digit revenue growth in this area.
In Asia Pacific, the company operates in 16 markets and has 700 retail stores. China is its largest country now. Growth there is seen in all channels: wholesale up 24 to 26 percent; retail stores, 22 to 24 percent and digital, 28 to 30 percent.
In wrapping up the day’s events, Plank stressed that although Under Armour is creating an “operationally efficient engine,” it will continue to innovate and market that with the passion and energy for which it has become known.
He said the company is now entering its “mature” phase, but “maturity doesn’t mean getting old, it means getting wise. Agility will define the next chapter of this brand.”