15 Feb Under Armour Q4 Beats Sales Targets
Under Armour Inc. said it plans to take additional restructuring charges in the range of $110 to $130 million in 2018 while announcing that its fourth-quarter sales exceeded estimates and earnings matched estimates.
“After years of rapid growth and building a globally-recognized brand, the dynamic landscape of 2017 was a catalyst for us to begin strategically transforming Under Armour into an operationally excellent company,” said Under Armour chairman and CEO Kevin Plank. “A year into this journey, our fourth quarter and full year results demonstrate that the tough decisions we’re making are generating the stability necessary to create a more consistent and predictable path to deliver long-term value to our shareholders.”
Fourth Quarter 2017 Review
- Revenue was up 5 percent to $1.4 billion (up 4 percent currency neutral). Wall Street’s consensus target was $1.3 billion.
- Revenue to wholesale customers declined 1 percent to $733 million and direct-to-consumer revenue was up 11 percent to $575 million. Direct-to-consumer represented 42 percent of global revenue in the quarter.
- Consistent with previous expectations, revenue in North America was down 4 percent. Strong international momentum continued with revenue up 47 percent (up 43 percent currency neutral), representing 23 percent of total revenue. Within international business, revenue in EMEA was up 45 percent (up 37 percent currency neutral), up 56 percent in Asia-Pacific (up 55 percent currency neutral) and up 36 percent in Latin America (up 34 percent currency neutral).
- Apparel revenue increased 2 percent to $952 million, as growth in men’s training and global football was tempered by declines in the team sports and outdoor categories. Footwear revenue was up 9 percent to $246 million, driven by strength in running, offset by team sports and basketball. Accessories revenue increased 6 percent to $111 million led by men’s training and running.
- Gross margin declined 150 basis points to 43.2 percent as benefits from changes in foreign currency rates and product costs were more than offset by pricing and other inventory management initiatives, and channel mix.
- Adjusted gross margin, which excludes a $1 million impact from restructuring efforts, was 43.3 percent.
- Selling, General and administrative expenses increased 40.7 percent to $591 million, or 43.3 percent of revenue, primarily due to third to fourth quarter timing shifts in marketing execution and lower incentive compensation in the prior period, as well as continued investments in the direct-to-consumer, footwear and international businesses.
- Restructuring and impairment charges were $36 million.
- Operating loss was $37 million. Adjusted operating income was $0 million
- Net loss was $88 million in the fourth quarter. Excluding both a one-time charge related to the U.S. Tax Act, and the impact of the restructuring plan, adjusted net loss was $1 million.
- Diluted earnings per share was negative $0.20. Adjusted earnings per share was $0.00, in line with Wall Street’s consensus target.
- Inventory increased 26 percent to $1.2 billion driven by a mid-teen percentage rate increase in North America and nearly 50 percent growth in the international business.
- Cash and cash equivalents increased 25 percent to $312 million.
Among product categories, apparel grew 2.5 percent to $951.7 million, footwear climbed 9.5 percent to $246.2 million, accessories advanced 6.1 percent to $110.7 million. Licensing revenues increased 10.1 percent to $32.9 million while its Connected Fitness climbed 30.8 percent to $23.9 million.
By region, North America’s sales were down 4.5 percent to $1.02 billion and was down 4.8 percent on a currency-neutral basis. Operating earnings in the North America segment showed a loss of $43.9 million against earnings or $157.3 million.
In the EMEA region, sales jumped 45.5 percent to $135.3 million and increased 37.0 percent on a currency-neutral basis. Operating income rose 29.8 percent to $4.0 million. Asia-Pacific’s sales climbed 55.7 percent to $123.9 million while expanding 54.6 currency-neutral. Operating earnings slid 6.8 percent to $13.0 million. Latin America revenues grew 36.0 percent to $58.0 million and added 33.8 percent on a constant-currency basis. Operating losses grew to $10.9 million from $6.1 million. In the Connected Fitness segment, sales rose 30.8 percent to $23.9 million. The segment showed an operating profit of $792,000 against a loss of $4.3 million.
Total international sales grew 47.7 percent and grew 42.9 percent on a currency-neutral basis.
Full Year 2017 Review
- Revenue was up 3 percent to $5.0 billion.
- Gross margin declined 140 basis points to 45.0 percent as inventory management initiatives more than offset favorable channel mix. Adjusted gross margin, which excludes a $5 million impact from restructuring efforts, was 45.1 percent.
- Selling, general, and administrative expenses was up 14 percent to $2.1 billion, representing 41.9 percent of revenue, an increase driven by continued investments in demand creation, and the direct-to-consumer, footwear and international businesses.
- Restructuring and impairment charges were $124 million in 2017.
- Operating income was $28 million. Adjusted operating income was $157 million.
- Net loss was $48 million in 2017. Excluding both the fourth quarter one-time charge related to the U.S. Tax Act, and the impact of the restructuring plan, adjusted net income was $87 million.
- Diluted earnings per share was negative 11 cents a share. Adjusted diluted earnings per share was 19 cents a share.
When it reported third-quarter results on October 31, Under Armour said it expects revenue to be up low-single digits and adjusted diluted earnings per share between 18 to 20 cents a share. Adjusted gross margins were expected to come in at 44.5 percent and adjusted operating income to reach $140 million to $150 million.
- Net revenue is expected to be up at a low single-digit percentage rate reflecting lower North American demand and operational challenges due to the implementation of the company’s enterprise resource planning system and related service levels.
- Gross margin is expected to be down approximately 220 basis points compared to 46.4 percent in 2016 as benefits from product costs and channel mix are more than offset by increased efforts to manage inventory within a highly promotional environment, impacts from the restructuring plan and increasing regional mix. Adjusted gross margin is expected to be down approximately 190 basis points compared to 46.4 percent in 2016.
- Operating income is expected to be approximately $0 to $10 million. Adjusted operating income is expected to reach $140 million to $150 million.
- Interest and other expense net of approximately $35 million.
- Excluding the effect of the restructuring plan, adjusted effective tax rate of approximately 23 percent.
- Adjusted diluted earnings per share of $0.18 to $0.20.
2017 and 2018 Restructuring Plans
On October 31, 2017, the company provided an update that it expected its restructuring plan (announced on August 1, 2017) would include approximately $140 to $150 million of pre-tax restructuring, impairment and related charges to be substantially completed in 2017. In the fourth quarter of 2017, it recognized pre-tax costs totaling $37 million comprised of $14 million in cash related charges and $23 million in non-cash charges. For the full year, $129 million of pre-tax charges were realized including $39 million in cash related charges and $90 million in non-cash related charges.
After additional review, the company has announced an additional 2018 restructuring plan identifying further opportunities to optimize operations. In conjunction with this plan, approximately $110 to $130 million of pre-tax restructuring and related charges are expected to be incurred, including:
- Up to $105 million in cash related charges, consisting of up to $55 million in facility and lease terminations and up to $50 million in contract termination and other restructuring charges; and,
- Up to $25 million in non-cash charges comprised of up to $10 million of inventory related charges and up to $15 million of asset related impairments.
Based on the restructuring efforts in 2017 and 2018, the company anticipates a minimum of $75 million in savings annually from these efforts in 2019 and beyond.
Full Year 2018 Outlook
Key points related to Under Armour’s full year 2018 outlook include:
- Net revenue is expected to be up at a low single-digit percentage rate reflecting a mid-single-digit decline in North America and international growth of greater than 25 percent.
- Gross margin is expected to increase approximately 50 basis points to 45.5 percent due to benefits from lower planned promotional activity, product costs, channel mix and changes in foreign currency.
- Operating income is expected to reach $20 million to $30 million. Excluding the impact of continued restructuring efforts, adjusted operating income is expected to be $130 to $160 million.
- Interest and other expense net is planned at approximately $45 million.
- Excluding the impact of the restructuring efforts, adjusted diluted earnings per share are expected to be in the range of $0.14 to $0.19; and,
- Capital expenditures are planned at approximately $225 million compared with $275 million in 2017.
U.S. Tax Act
The U.S. Tax Act was enacted into law on December 22, 2017. The new legislation contains several key tax provisions that affect Under Armour and, as required, the company has included reasonable estimates of the income tax effects of the changes in tax law and tax rate in the company’s 2017 financial results. These changes include a one-time mandatory transition tax on accumulated foreign earnings and a re-measuring of deferred tax assets, resulting in an increase to the company’s provision for income taxes of $39 million and a decrease to diluted earnings per share of $0.09 for both the fourth quarter and full year of 2017. Since the U.S. Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and additional accounting interpretation are expected over the next 12 months, the company considers the accounting of the transition tax, deferred tax re-measurements and other items to be provisional based on potential future guidance. The company expects to finalize its estimates within the one-year measurement period allowed by the SEC.
Non-GAAP Financial Information
This press release refers to “currency neutral” and “adjusted” results as well as “adjusted” forward-looking estimates of the company’s fiscal 2018 outlook. Currency neutral financial information is calculated to exclude the impact of changes in foreign currency. Management believes this information is useful to investors to facilitate a comparison of the company’s results of operations period-over-period. Adjusted operating income, adjusted gross margin, adjusted effective tax rate, adjusted net income and adjusted diluted earnings per share exclude the impact of restructuring and other related charges and the impact of the U.S. Tax Act, as applicable. Management believes this information is useful to investors because it provides enhanced visibility into the company’s actual and expected underlying results excluding the impact of its restructuring plans and recent significant changes in U.S. tax laws. These non-GAAP financial measures should not be considered in isolation and should be viewed in addition to, and not as an alternative for, the company’s reported results prepared in accordance with GAAP. Additionally, the company’s non-GAAP financial information may not be comparable to similarly titled measures reported by other companies.
Photo courtesy Under Armour