Under Armour’s Q3 Flies Past Estimates

Under Armour’s Q3 Flies Past Estimates

Under Armour Inc. reported earnings that handily topped Wall Street’s targets as international sales continue to spike and promotional activity lessened. Sales in the U.S. declined 2 percent. Earnings guidance for the year was slightly raised.

“Our third quarter results demonstrate that our multi-year transformation is on track,” said Under Armour Chairman and CEO Kevin Plank. “As we work through this chapter, we are staying sharply focused on our brand by connecting even more deeply with our consumers while delivering industry-leading, innovative products and premium experiences. Coupled with increasingly greater business discipline and resulting efficiencies, we continue to gain confidence in our long-term path and ability to deliver for our consumers, customers and shareholders.”

Third Quarter Review

  • Revenue was up 2 percent to $1.4 billion (up 3 percent currency neutral), in line with Wall Street’s target of $1.42 billion on average.
  • Gross margin increased 10 basis points to 46.1 percent compared to the prior year including a $5 million impact related to restructuring efforts. Excluding restructuring efforts in both periods, adjusted gross margin increased 20 basis points to 46.5 percent compared to the prior year, driven predominantly by product cost improvements and lower promotional activity offset by channel mix.
  • Selling, general & administrative expenses increased 5 percent to $528 million, or 36.6 percent of revenue driven by continued investments in the direct-to-consumer, footwear and international businesses.
  • Restructuring and impairment charges were $19 million.
  • Operating income was $119 million against $62.2 million. Adjusted operating income was $143 million against $151 million a year ago, representing a decline of 5.3 percent.
  • Net income was $75 million, or 17 cents per diluted share, up from $54.2 million, or 12 cents, a year ago. Adjusted net income was $112 million, or 25 cents per share, up from $100 million, or 22 cents, a year ago. Wall Street’s consensus estimate had been 12 cents.
  • Inventory decreased 1 percent to $1.2 billion.
  • Cash and cash equivalents decreased 35 percent to $169 million.

2018 Restructuring Plan

The company expects to incur approximately $200 to $220 million in pre-tax restructuring and related charges in connection with its previously announced 2018 restructuring plan. Through the third quarter of 2018, the company has recognized pre-tax costs of $154 million, inclusive of $24 million of pre-tax costs recognized in the third quarter.

Under Armour again slightly raised the costs of its restructuring program. When it released second-quarter results, the company expected restructuring efforts between $190 million to $210 million. When the program was first announced in February, estimated pre-tax restructuring and related charges were projected to range between $110 million to $130 million.

Updated Fiscal 2018 Outlook

  • Revenue is expected to increase approximately 3 to 4 percent reflecting a low single-digit decline in North America and international growth of approximately 25 percent. From a product perspective, apparel is expected to grow at a mid-single-digit rate, footwear at a low single-digit rate and accessories is now expected to decline at a mid-single-digit rate.
  • Gross margin is expected be flat to down slightly versus the prior year rate of 45.0 percent. Adjusted gross margin is expected to improve slightly compared to 2017 as benefits from product costs and lower planned promotional activity are offset primarily by inventory management actions.
  • Operating loss is now expected to be approximately $50 to $55 million versus the previously expected $60 million loss. On an adjusted basis, operating income is now expected to reach the $150 to $165 million range versus the previous $140 to $160 million range.
  • Interest and other expense net is now expected to be approximately $50 million, up slightly from the previous $45 million expectation due to foreign currency headwinds.
  • Due to a one-time tax benefit related to an inter-company asset sale, the full year adjusted effective tax rate is now expected to be 13 to 15 percent versus the previous expectation of 25 to 27 percent. This equates to approximately $0.02 of diluted earnings per share benefit in 2018.
  • Excluding the impact of the restructuring efforts, adjusted diluted earnings per share is now expected to be in the range of $0.19 to $0.22 versus the previous expectation of $0.16 to $0.19.
  • Capital expenditures are now planned at approximately $175 million versus the previous $200 million expectation.
  • Year-end inventory for 2018 is expected to be flat to down slightly.