It was a mixed bag for Under Armour in the second quarter, with the Baltimore-based sports brand posting better-than-expected earnings but lowering its sales guidance for the year as business in North America continues to trend down.
For the period ended Sept. 30, Under Armour reported net income of $109.6 million, or 24 cents a share, up from $86.9 million, or 19 cents a share, in the prior year. Sales were flat year-over-year, coming in at $1.567 billion, down marginally from $1.574 billion a year ago.
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Analysts had been expecting earnings per share of 20 cents and revenue of $1.566 billion, according to Marketwatch.
The company cited lower freight and supply chain costs that led to a gross margin increase of 260 points, to 48 percent as a positive in the period.
North America, the company’s largest market, showed a sales decrease of 2 percent from the prior year to $991 million, while international revenue rose 5 percent to $573 million. Overseas, the company saw strength in the Europe, Middle East and Africa region where sales rose 9 percent, and Asia-Pacific, where they increased 3 percent. However, Latin America was down 8 percent.
In a conference call Wednesday morning, Stephanie Linnartz, president and chief executive officer, said driving U.S. sales is a priority for the company going forward. She said the expected downturn in the second half is being driven by continued “pressures in our wholesale business,” due in part to inflation and lower consumer confidence, which have led to promotions and an “overall softness in our future wholesale order book.”
To counteract these challenges, she said, the company is leaning into a more premium wholesale distribution strategy. As reported, Under Armour had made plans to exit 2,000 to 3,000 doors in North America to focus on more productive partnerships such as those with Dick’s Sporting Goods and Macy’s.
In the quarter, wholesale revenue decreased 1 percent to $840 million, while direct-to-consumer sales increased 3 percent to $596 million led by e-commerce, which represented 35 percent of DTC sales in the quarter. Revenue at the company’s owned and operated stores was down 4 percent, however.
By category, apparel sales — driven by growth in train and golf product — rose 3 percent to $1.1 billion, while footwear was down 7 percent to $351 million. Footwear sales were impacted by softness in team sports and run categories. Accessories sales increased 3 percent to $1.1 billion.
Under Armour also updated its outlook for fiscal 2024, projecting that revenue will be down 2 to 4 percent the previous expectation of flat to slightly up. In North America, sales are expected to be down 5 to 7 percent versus the previous projection of down 3 to 4 percent. Operating income projections for the year remained the same, with expectations of $310 million, or 47 cents a share, to $330 million, or 51 cents, for the year.
In the earnings call, Linnartz, who took over the helm of the company in February, reiterated that fiscal 2024 is being viewed as “a year of building for Under Armour. It’s a year of assessment, resetting and simplifying our approach to balance the short-term optimization and profitability of our business with long-term brand building and the ability to deliver more consistent top-line growth.”
She said that over the past three months, the company has continued to “dig into our product pipeline, distribution strategy, operating model and the financial discipline necessary to drive a more consistent trajectory for our future.”
On the product end, the company is focusing more on elevated design and product, in footwear, Sportstyle and womenswear, and recently brought John Varvatos on board as chief design officer. “He has quickly added leadership maturity, direction and strength to our design organization, bringing a fresh perspective and helping us elevate our approach to our athletes’ lives outside the gym,” she said. The company is still seeking a new head of product and design “to break through at the intersection of where style and design meet performance.” But Varvatos’ impact will not be felt until the back half of next year because the company’s pipeline is 15 to 18 months, she said.
Linnartz said she views footwear as “our single most significant growth opportunity” and pointed to strong results from the Curry brand shoe, the Forge, a retro-style sneaker, as well as the SlipSpeed, a slip-on model targeted to young people and designed to be worn for training and recovery.
Linnartz also singled out the appointment of Jim Dausch as chief consumer officer as a benefit to the company, saying he is working to “improve our consumer-facing functions by prioritizing efforts to advance our digital business.”
She also pointed to what she called “brand heat moments,” such as ambassador Bryce Harper wearing Harper 8 cleats in the World Series and Sharon Lodeki, who raced to a third-place finish in the New York City Marathon in the UA Flow Velociti Elite 2 shoes.
Linnartz said these events signal a “significant evolution in our approach to marketing, which is much more focused on capitalizing on our assets to generate returns via product marketing rather than simply leaning into large-scale ad campaigns.”
Summing up the period as a whole, Linnartz said: “Our second-quarter results, particularly profitability, exceeded our expectations. Consequently, we are maintaining our fiscal 2024 operating income and EPS outlook even as we lower our revenue expectations primarily in response to challenges in North America during the back half of the year.”
She added: “As we execute against our strategic priorities, we will continue to take a balanced approach to driving profitability in the near term while taking the necessary steps to invest in the talent, systems and processes to drive the top-line growth that Under Armour is capable of over the long term.”
In the call, Linnartz said the new UA Rewards loyalty program “has exceeded our initial expectations,” and has already signed up more than 1 million members. The program is expected to “inspire better sales conversion” in the future, she said.
Even so, in the third quarter, sales are expected to decline at a midsingle-digit rate due to softer wholesale orders in North America, leading to a projected revenue decrease of 3 to 5 percent in the fourth quarter, David Bergman, chief financial officer, said on the call. And operating income in the third quarter is expected to reach approximately $65 million to $75 million, and $75 million to $85 million in the fourth quarter, he added.
Neil Saunders, managing director of GlobalData, was largely unimpressed with the results, writing in a research note: “The positive news from Under Armour is that the decline, which started last quarter, has moderated rather than accelerated. Even so, the latest numbers are a long way from robust and show a company that is still struggling to gain ground in a more challenging market. The one ray of light is that despite the continued revenue decline, Under Armour managed to push out much better numbers on the bottom line thanks to lower freight and supply chain expenses.”
Saunders said the sales decrease in North America continues to “be a concern” because consumer spending in the region has “generally held up well,” indicating Under Armour is “still underperforming compared to many of its peers, although it has managed to close the gap since the prior quarter.”
He believes Under Armour’s product assortment “needs to be a lot stronger” if it is to rebound in the future. “The brand tends to stray between emphasizing technical benefits and trying to be more fashion-focused, which isn’t helpful for clarity. At present, it seems to be leaning more heavily into fashion and, unfortunately, some of the newer additions to the assortment are not particularly compelling in terms of either quality or design. This lack of discipline has long been one that has plagued Under Armour and, in our opinion, desperately needs to be remedied if the brand is to rebuild its image and build a more stable stream of revenue.”
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