Under Armour reported net income of $38.9 million for the third quarter, compared with $102.3 million in the year-ago period, on virtually flat revenues of $1,433 million. Aside from a weaker gross margin, the lower profitability was essentially due to ongoing restructuring and impairment changes of $74.2 million for the quarter, but the management said it believes that “the critical mass of our transformational challenges is behind us.”
Patrik Frisk, president and chief executive of the group, said the results reflect considerably better-than-expected performance due to higher demand and “strong execution, especially in North America.”
While decreasing by 5 percent to $963 million in North America, revenues went up by 18 percent to $433 million in the rest of the world. In local currencies, they rose by 26 percent in EMEA and by 15 percent in Asia-Pacific, but fell by 7 percent in Latin America. The strong progress in EMEA was partly due to a stronger euro and a shift for some deliveries from the second to the third quarter. It led to an 86 percent boost in the region’s operating profit to $40.8 million on revenues of $210.1 million. The operating results declined in North America and Asia-Pacific but improved in Latin America.
Continued strong growth in e-commerce led the direct-to-consumer (DTC) business to increase by 17 percent to $540 million in the quarter, but wholesale revenues declined by 7 percent to $830 million. The management indicated that it plans to start cutting off “undifferentiated retail partners” in North America.
Revenues from apparel fell by 6 percent to $927 million, with drops in team sports and training, but footwear and accessories showed improvements, thanks to higher sales of running and training shoes and the launch of the company’s sports masks. Respectively, they rose by 19 percent to $299 million and by 23 percent to $145 million.
The gross margin was off by 0.4 percentage points to 47.9 percent, mainly due to coronavirus-related discounting and the product mix, which offset new supply chain efficiencies and a better channel mix.
The operating profit declined to $59 million from $138.9 million in the year-ago quarter. Excluding the impact of extraordinary charges, the adjusted operating income would have reached a level of $133 million, leading to an adjusted net profit of $118 million.
Through the third quarter, Under Armour has booked $550 million in restructuring and impairment charges.
The company is projecting an adjusted operating loss of around $140-150 million for the full financial year. Channel mix benefits and supply chain efficiencies should lead to an improvement in the gross margin of between 0.2 and 0.4 percentage points as compared to 2019, although the margin will be under pressure in the fourth quarter because of a potentially stronger promotional environment.
The sales outlook for the fourth quarter has improved, with the management now expecting a decline of between 10 and 15 percent instead of 20-25 percent, due to changes in supply chain timing and lower-than-planned excess inventory sales, despite a substantial decline in licensing revenues.
This forecast is based on the majority of Under Armour’s retail stores around the world remaining open in the quarter, but this may not be the case in Europe judging from the recent measures announced in France and Germany. For the full financial year, the company’s sales are expected to be off by more than 20 percent in North America and by between 5 and 10 percent in the rest of the world.
Under Armour ended the third quarter with cash and cash equivalents of $866 million. A further $345 million will enter its coffers during the fourth quarter through the separately reported sale of its MyFitnessPal diet-tracking platform to a private equity firm, Francisco Partners. In connection with this transaction, Under Armour will discontinue its European-based Endomondo platform at the end of 2020, but it will keep its MapMyFitness platform, which includes the MapMy Run and MapMy Ride apps. UA bouhgt MyFitnessPal and Endomondo in 2015, respectively for $475 million and $85 million.
The brand is still committed to maintaining its involvement in connected fitness, which is enjoying a boom, although the segment’s revenues declined by 6 percent to $36.9 million in the latest quarter. Under Armour’s core strategy is to deepen its direction connection with its target customer, described as the ”focused performer,” while prioritizing profitability over sales growth by maximizing efficiencies across its operations.
It sees the highest growth potential in women’s and footwear. A new cushioning technology that virtually eliminates the outsole, called UA Flow, will make its debut in basketball shoes like the Curry 8 and then be applied to running shoes early next year.