Boosted by strong international sales and a vast restructuring plan undertaken in 2017 after a series of weak results, Under Armour is turning around, posting results for the fourth quarter that topped its own guidance.
The company identified cutbacks and investments that raised restructuring and related charges to $183 million throughout 2018. It has planned to cut approximately 650 staff between last year and March 2019 to shift its resources to more productive areas, such as international expansion and online retailing, and to compete more efficiently with Nike and Adidas.
In the fourth quarter of 2019, UA's overall revenues rose by 2 percent from the year-ago period to $1,400 million, up by 3 percent in constant currencies. The gross margin went up by 1.6 percentage points to 45.0 percent, despite a negative impact of $2 million from the restructuring measures taken in the quarter. The adjusted gross margin reached 45.1 percent. After restructuring and impairment charges of $48 million, the company recorded an operating loss of $10 million for the quarter, while the adjusted operating income reached $40 million.
The management said these results confirm that its reorganization plan is working. It highlighted efforts such as the closing of underperforming facilities and retail locations, the exit from certain sports marketing contracts, the optimization of the global workforce and aggressive clearance of excess inventories. The company also shortened lead times along the supply chain and is now continuing to increase distribution efficiencies.
Within the various product category and merchandising teams, it has aligned calendars across all functions and streamlined its category structure, removing a significant number of SKUs, styles, trims and materials. It plans to build up new product franchises gradually, making the most of new technologies, rather than jumping from one product release to another.
In North America, UA's revenues were down by 6 percent to $965 million in the quarter, primarily due to a contraction in the wholesale business, coupled with lower sales to the group's off-price channel. In the rest of the world, revenues jumped by 24 percent overall, and now account for 28 percent of total turnover.
In Europe, the Middle East and Asia (EMEA), sales advanced by 32 percent to $178.1 million, driven primarily by growth in the wholesale business, coupled with continued strength in DTC, but the company ended the year with some excess inventories in the region. Sales also went up by 35 percent to $167.5 million in Asia-Pacific, lifted by the business in China. Between its owned and partner doors, Under Armour now has over 660 locations in the region with the majority in Mainland China.
Revenues were down by 15 percent to $49.2 million in Latin America, due primarily to a change in the business model in Brazil, which transitioned from a subsidiary to a licensing and distributor deal with Vulcabras. This has led to lower yet more profitable revenues.
Training was a key category behind a 2 percent increase in apparel sales to $970 million. Footwear decreased by 4.0 percent to $235 million, primarily because of lower sales to off-price retailers. Sales of accessories dipped by 2 percent to $108 million.
By channel, sales to wholesale customers went up by 1 percent to $737 million, while direct-to-consumer revenues were flat compared with the prior year at $577 million, representing 41 percent of total revenue in the quarter.
Overall, the company's net income reached $4 million, compared with a net loss of $88 million for the year-ago quarter, when the company faced a one-time charge related to the U.S. Tax Act.
For the full year, UA's revenues were up by 4 percent to $5,200 million, including an increase of 3 percent in wholesale to $3,100 million and 4 percent in DTC to $1,800 million. The gross margin inched up by 0.1 percentage points to 45.1 percent. The company suffered a net loss of $46 million on a reported basis, but booked adjusted net income of $122 million. In 2017, net income had reached $28 million, or $157 million on an adjusted basis.
UA has been generating cash in spite of its restructuring measures and relatively weak operating earnings, which anyway increased on an adjusted basis to $158.1 million for the year from $89.5 million in 2017. The company earned more money than before only in Asia/Pacific and Connected Fitness, respectively $21.4 million and $4.0 million. The operating results deteriorated with losses of $66.3 million in North America, $11.1 million in EMEA and $11.0 million in Latin America. The European losses stemmed in part from an expansion in DTC activities.
The company is projecting a sales increase of about 3 to 4 percent for 2019, combining flat results in North America with double-digit international growth. The group also anticipates that its gross margin will improve by 0.6 to 0.8 percentage points as compared to 2018, and that its operating income will stand between $150 million and $165 million.
The management said it will focus on expanding globally, empowering its regional businesses with a stronger, more consistent structure and operating model, including dedicated and localized support functions. It will also use data analytics to fine-tune key decisions.
