Under Armour See North American Rebound

Under Armour See North American Rebound

Under Armour Inc. reported a steep loss in the second quarter after restructuring activities and said it had planned to spend an additional $80 million on restructuring efforts this year. The loss before charges was in line with Wall Street’s expectations. Sales were ahead of expectations as North American sales grew for the first time in a year.

“Through the first half of 2018, we are making progress toward our transformation of running a more operationally excellent company while amplifying the power of the Under Armour brand,” said Under Armour Chairman and CEO Kevin Plank. “The ongoing improvements in our structure, systems and go-to-market process across our global business better position us to drive a more consistent, predictable path to deliver for our consumers, customers and shareholders over the long-term.”

Second Quarter Review

  • Revenue was up 8 percent to $1.18 billion (up 7 percent currency neutral).
  • Gross margin decreased approximately 110 basis points to 44.8 percent due to inventory management initiatives and a $6 million impact related to restructuring efforts. Adjusted gross margin decreased 60 basis points to 45.3 percent driven predominantly by inventory management initiatives.
  • Selling, general and administrative expenses increased 10 percent to $553 million, or 47.0 percent of revenue driven by continued investments in our direct-to-consumer, footwear, and international businesses, along with a reserve related to a commercial dispute.
  • Restructuring and impairment charges were $79 million.
    Operating loss was $105 million. Adjusted operating loss was $20 million.
  • Net loss was $96 million. Excluding the impact of the restructuring plan, adjusted net loss was $34 million.
  • Diluted loss per share was $0.21. Adjusted diluted loss per share was $0.08.
  • Inventory increased 11 percent to $1.3 billion.
  • Cash and cash equivalents increased 19 percent to $197 million.

Wall Street was also expecting 8 cents a share on an adjusted basis. Sales were above consensus expectations of $1.15 billion.

2018 Restructuring Plan

On February 13, the company announced a 2018 restructuring plan, which detailed expectations to incur total estimated pre-tax restructuring and related charges of approximately $110 million to $130 million. After further review, the company has identified approximately $80 million of additional restructuring initiatives and now expects to incur approximately $190 million to $210 million of pre-tax restructuring and related charges in 2018. In the second quarter, we recognized pre-tax costs totaling $85 million consisting of $64 million in cash related charges and $21 million in non-cash charges. Based on the updated restructuring plan, in 2018 the company expects to incur:

  • Up to $155 million in cash related charges, consisting of up to $75 million in facility and lease terminations and up to $80 million in contract termination and other restructuring charges; and,
  • Up to $55 million in non-cash charges comprised of up to $20 million of inventory related charges and up to $35 million of asset related impairments.

Plank concluded, “As we work through our multi-year transformation, we continue to proactively attack underperforming areas of our business including our SG&A cost structure and inventory. All of this will help create a better and stronger Under Armour through even greater operational efficiencies. We are unwavering in building our global brand and confident we’re on the right track.”

Updated Fiscal 2018 Outlook

  • Net revenue is now expected to increase approximately 3 percent to 4 percent reflecting a low to mid-single-digit decline in North America and international growth of greater than 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 expected to decline at a low-single digit rate.
  • Gross margin is now expected to be flat to down slightly versus the prior year rate of 45.0 percent. Adjusted gross margin is now expected to improve slightly compared to 2017 as benefits from product costs and lower planned promotional activity are offset by increased inventory management actions.
  • Operating loss is now expected in the range of $50 million to $60 million. Excluding the impact of the restructuring plan, adjusted operating income is expected to be $130 million to $160 million.
    Interest and other expense net is expected to be approximately $45 million.
  • Excluding the impact of the restructuring efforts, adjusted diluted earnings per share is expected to be in the range of $0.14 to $0.19.
  • Capital expenditures are now planned at approximately $200 million.

Previously, Under Armour expected net revenue  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 was 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 was expected to reach $20 million to $30 million. Excluding the impact of continued restructuring efforts, adjusted operating income was expected to be $130 million to $160 million, the same as the updated guidance. Excluding the impact of the restructuring efforts, adjusted diluted earnings per share is still expected to be in the range of 14 cents to 19 cents. Capital expenditures are planned at approximately $225 million compared with $275 million in 2017.