Under Armour upgraded its guidance while posting better-than-expected results for the third quarter ended Sept. 30, leading to a jump of more than 18 percent in its stock price, close to its 52-week record of $26.45. The company’s net earnings soared to $113.4 million, more than twice the analysts’ consensus on Wall Street, from $38.9 million in the same period a year ago. On an adjusted basis, after strongly reduced restructuring changes of $17 million and other items, they went up by 23 percent to $145 million.
Patrik Frisk, president and CEO of the company, said the latest results show that the company is reaping the fruits of its transformation, using a “consumer-led strategy” and actions that are leading the brand to achieve “a more premium positioning” in the market.
While admitting that Covid-19 may further impact its supply chain, the company said it is now projecting an increase of around 25 percent in revenues for the year, with percentage improvements in the high 20s in North America and in the mid-30s in the rest of the world. In spite of higher freight charges, the gross margin should go up by about 1.3 percentage points to an adjusted rate of 48.6 percent, thanks to better pricing and foreign currency gains.
After restructuring charges, adjusted operating earnings are expected to hit $475 million, leading to and adjusted operating margin of 8.5 percent and an indicated net profit of around $319 million. This would compare with an adjusted net loss of $76.2 million in 2020 on revenues of $4.47 billion.
In the third quarter, the gross margin was 3.1 percentage points higher than a year ago at 51.0 percent, thanks in part to fewer discounts, despite decreases of 0.9 percentage points due to increased freight expenses and one percentage point from the disposal of the MyFitnessPal platform. The positive factors included a boost of 4 percentage points from better pricing and 1.2 percentage points from the elimination of about 3,000 off-price points of sale from its wholesale network in North America, which repreented between 3 and 4 percent of sales.
After restructuring charges of $17 million, UA’s adjusted operating income went up to $189 million in the third quarter. With operating expenses up by 8 percent, including higher marketing expenses, the operating margin jumped to 11.1 percent from 4.1 percent, but the management declined to predict when the company will consistently reach a double-digit margin, while noting that there is potential for higher gross margins and higher profits from e-commerce.
Sales rose by 8 percent to $1,545 million in the quarter, with growth of 6 percent in constant currencies. Wholesale revenues grew by 10 percent to $911 million. Direct-to-consumer (DTC) revenues rose at a slightly faster pace of 12 percent to $604 million in spite of a 4 percent decline in e-commerce, which represented 33 percent of the DTC business. It was up by 50 percent from the third quarter of 2019 in North America.
Revenues rose by 8 percent in North America to $1,035 million in the quarter, generating an operating margin of 28.2 percent. Sales increased by 18 percent to $510 million in the rest of the world, and they were up by 13 percent on a constant-currency basis, with gains of 11 percent in EMEA, 13 percent in Asia-Pacific and 27 percent in Latin America.
Compared with the third quarter of 2019, sales were up by 2 percent in North America, by 37 percent in Asia-Pacific, by 50 percent in EMEA and by 8 percent in Latin America, where UA has been transitioning to a distributor model.
Excluding general corporate charges, UA booked a quarterly operating margin of 17.3 percent in the EMEA region on revenues of $41.8 million, down from a margin of 19.4 percent a year earlier. Margins improved in Asia-Pacific to 19.1 percent on sales of $40.5 million. They went up sharply in Latin America to 19.2 percent on revenues of $10.8 million.
Frisk noted that the general market environment has become softer in Asia, where it is still digital-driven, with many new platforms emerging. While the U.S. customer has remained in the digital channel, many European customers have returned to brick-and-mortar stores, willing to pay premium prices.
In terms of product categories, apparel continued to take the lion’s share globally with a 14.2 percent increase to $1,058 million, driven by training and golf, while footwear rose by 10.4 percent to $330 million, driven by strength training and running. Curry styles were particularly popular in Europe. Accessories declined by 12.9 percent to $126 million because of the demise of UA’s Sport Mask. Licensing revenues declined by 23.8 percent to $31.1 million/
UA said its inventories were down by 21 percent year-on-year on Sept. 30, but they are expected to be flat on an annual basis by the end of 2021. About half of the products are coming from Asia, including South Vietnam. The management pointed out that all the factories are now open, but it will take time until the end of this year to go back to full capacity, which has led UA to cancel some orders for spring/summer 2022.
On the other hand, the company is facing higher in-transit times, which has become a bigger concern going forward for the first part of 2022. As a result, UA is anticipating a low single-digit sales increase for the first three months of 2022.
