Under Armour’s profits and revenues for the third quarter exceeded Wall Street’s estimates, although the company has lowered its full-year revenue forecast, citing lower than planned excess inventory to service the off-price channel, ongoing traffic and conversion challenges in the direct-to-consumer channel, as well as currency headwinds. Revenues are now expected to increase by only about 2 percent this year, versus a previously expected range of 3 to 4 percent.
However, the company anticipates a higher gross margin, which is now forecast to expand by around 1.3 to 1.5 percentage points, compared with the previously expected range of 1.1 to 1.3 percentage points, due to ongoing supply chain initiatives and additional channel mix benefits.
During the latest quarter, Under Armour’s global sales declined by 1 percent from the same period a year-ago to $1,429 million, primarily because of lower sales to the off-price channel in North America, where the brand continues to face significant challenges in a very competitive environment from more international brands such as Nike, Adidas and Puma. On a currency-neutral basis, revenues remained flat.
On the other hand, the company’s gross margin rose by 2.2 percentage points to 48.3 percent, thanks to supply chain improvements, restructuring initiatives and the regional mix. Net income soared by 36 percent to $102.3 million.
North American sales declined by 4 percent to $1,015 million in the quarter. In particular, the management highlighted ongoing traffic challenges in its outlet store business and lower conversion rates in its digital channel. The region’s operating income fell by 6 percent to $237.2 million.
Abroad, however, sales continued to rise, gaining 5 percent to $368.1 million, or 8 percent in constant currencies, and representing 26 percent of total revenues. The progress was led by EMEA, where sales rose by 13 percent in constant currencies to $161.0 million, with continued growth in wholesale and DTC operations. Within the wholesale channel, the results were positively impacted by improved service levels and earlier-than-planned shipments related to Brexit. There was further good progress in Europe in terms of profitability, with an operating profit up by 31 percent to $22.0 million.
In Asia-Pacific, revenues were up by 4 percent in constant currencies, rising to $154.9 million. The regional operating income fell by 5 percent to $34.7 million, following the disclosure of an unexpected loss by UA’s Japanese licensee, and the losses are expected to persist for the rest of the year.
Latin America was down by 4 percent on a constant-currency basis to $52.2 million, due to the shift in the Brazilian distribution of the brand to Vulcabras. However, the region returned to profit, with an operating income of $233,000 compared with a loss of $3.8 million for the third quarter of 2018.
On a global basis, UA’s wholesale revenues dropped by 2 percent to around $892 million, while DTC inched down by 1 percent to about $463 million, representing 32 percent of revenues in the quarter.
The company saw footwear sales decline by 12 percent to $250.6 million, while apparel revenues went up by 1 percent to $985.6 million. Accessories advanced by 2 percent to $118.2 million. Licensing revenues fell by 6 percent to $29.6 million, while the connected fitness division’s revenues jumped by 22 percent to $39.3 million.
Accounting probe sinks UA’s share price
Under Armour’s share price fell back nearly to a 52-week low following revelations in the Wall Street Journal about its accounting practices. It is suspected by the authorities of having tampered with its accounts to give the appearance of more solid results than in reality, postponing certain sales from one quarter to the next.
The company confirmed that it is being investigated in the U.S. on the subject. The management did not dwell much on the case, except to say that it was confident that its accounting practices were proper and it has been cooperating with the investigation since it opened in 2017.
It indicated that its restructuring plan remains on schedule but that the process will take time as it looks to revamp the senior management team, improve its North American distribution and reduce promotions. Meanwhile, Chip Malloy has resigned for personal reasons as the company’s chief financial officer. He had assumed the role at the beginning of 2016.
A company in Baltimore, Murphy Falcon & Murphy, has reacted to the disclosure by filing a lawsuit in connection with the investigation, noting that UA should have disclosed the existence of the probe in 2017. The suit alleges that UA executives were motivated to shift revenues back and forth between quarters to keep a steady string of quarterly sales increases of more than 20 percent.
