Yahoo Sports Under Armour Cuts Outlook as Costs and Cancellations Rise
Updated Aug. 3. 12 p.m.
Under Armour is not expecting a robust second half as a glut of inventory prepares to hit the market and the company experiences elevated supply chain costs and order cancellations.
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In reporting results for the first quarter of fiscal 2023 on Wednesday morning, Colin Browne, the company’s interim president and chief executive officer, warned that “industry-wide inventory challenges and more significant inflationary pressures make for a cautious consumer outlook for the balance of the year. Accordingly, we assume the market will be very promotional. And we will need to participate in many of these promotions, which is the primary factor for our margin call down.”
Before the market opened, the Baltimore-based athletic brand reduced its expectations for the year, now projecting that operating income will be $300 million to $325 million, down from previous projections of $375 million to $400 million. Excluding an expense related to ongoing litigation matters, adjusted operating income is expected to now reach $310 million to $335 million and diluted earnings per share are now projected to be between 61 cents to 67 cents, down from the previous expectation of 79 cents to 84 cents.
Sales, however, are still expected to increase 5 percent to 7 percent.
In the first quarter, Under Armour reported operating income of $34 million, adjusted operating income of $44 million and diluted earnings per share of 2 cents. Sales in the period ended June 20 were flat at $1.3 billion compared to the prior year.
While wholesale revenue increased 3 percent to $792 million, direct-to-consumer sales fell 7 percent to $521 million, driven by an 8 percent decline in owned and operated store revenue, the company said. In addition, e-commerce revenue, which represented 39 percent of the total direct-to-consumer business in the quarter, declined 6 percent. David Bergman, chief financial officer, said there was “positive momentum” in the company’s full-price stores and e-commerce operation but decreased sales in its outlets.
Specifically, sales in North America were flat compared to the $909 million posted in the same period last year and international revenue declined 3 percent, to $431 million, as sales in Asia Pacific, hindered by the lockdowns in China, fell 8 percent. Sales decreased 1 percent in EMEA. Latin American sales were up 6 percent. Apparel sales fell 1 percent to $868 million; accessories sales dropped 13 percent to $97 million, and footwear revenue fell 1 percent to $347 million. Bergman said the accessories business was impacted by planned lower sales of its Sportsmask.
Browne, the former chief operating officer, stepped up to the top position when Patrik Frisk announced in May that he would be stepping down as CEO on June 1 after just over two years.
In the earnings call, he said the company has identified demand for Under Armour “across the less sweaty non-elevated heart rate parts of their day. Quite simply, they love wearing our brand and want more access to it, more style, more options and more usage occasions. We’re actioning how Under Armour can best meet these needs carefully and responsibly to build upon the trust and credibility we’ve earned over the years as a performance brand. This will not require a significant transformation, but incremental evolution to better serve our athletes.”
During his tenure, Frisk had focused almost exclusively on product to be worn for sports and performance. The Swedish-born Frisk, who had served as CEO of Aldo Group and had also worked at The North Face, Timberland and Vans, instituted a $200 million, five-year turnaround plan with a focus on bringing Under Armour back to its roots as a sports brand. He eliminated 2,500 wholesale accounts in North America, parted ways with many of the company’s long-tenured executives and doubled down on sports apparel, accessories and footwear rather than lifestyle apparel.
On the earnings call Wednesday morning, founder and brand chief Kevin Plank, kicked off the recap saying the company has “no delusions of getting back to any previous chapter in our past. We are both looking and moving forward,” and the go-forward strategy will be an “amplification of our existing strategy.” That translates into continuing to focus on developing innovations that allow the brand to remain at “the intersection of performance and style.”
He said the company will introduce a new football platform this fall that he believes can “change the athletic footwear landscape.” In addition, he said a new technology will be offered in a training shoe that “can become a signature item for our current $1.5 billion footwear business” and can be rolled out to other categories as well.
He also cited potential expansion for athletes who wear Under Armour during their sports activities to also don the brand on other wearing occasions. “This is more than a vision,” Plank said. “This is actionable, something we can go after.”
He also provided an update on the company’s CEO search, saying the process is being led by Karen Katz, the former CEO of Neiman Marcus who is a member of Under Armour’s board of directors. The pool of candidates is “thorough and robust,” he added, and includes Browne. Plank said the company will make a decision before the end of the year.
Bergman said he expects the second-quarter revenue to be flat to slightly up in the low- to mid-single-digit range. “This includes about five percentage points of headwinds from proactive reductions and cancellations to our order book due to COVID-19-related supply constraints,” he said. Gross margin is expected to be down approximately 550 to 600 basis points in the period as a result of heightened promotions, increased freight expenses and pressures from changes in foreign currency.
Analysts were underwhelmed with the brand’s results. Neil Saunders, managing director of GlobalData, said, “In contrast to the robust growth delivered over the past year and a half, today’s numbers from Under Armour look positively anemic. To be fair, these results are delivered against a peak year in 2021 when sales soared by 91 percent. Against that context, the shallower figures do not look quite so bad and, indeed, suggest that Under Armour has been able to hold on to almost all the ground it gained during the pandemic and subsequent consumer spending boom.”
Still, compared to other athletic brands like Lululemon, he continued, “its success is not quite as bright.” He pointed to Under Armour’s “relative lack of owned stores,” which means it is more reliant on third parties. “This works reasonably well in a solid player like Dick’s but is often a comparative disaster at chains like Kohl’s. In our view, Under Armour needs a more disciplined distribution strategy that fully aligns with the future direction of the brand — even more so now it seems to be pushing into more lifestyle and casual product alongside its sporting ranges.”
Under Armour closed at $8.47, up 22 cents or 2.67 percent, on the Nasdaq exchange on Wednesday.
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