Under Armour unveiled its latest restructuring plans as it reported a sales rise of 8.7 percent to $1,088.2 billion for the second quarter, up by 8 percent in constant currencies. The increase was entirely driven by international markets. Sales in North America were nearly flat, up 0.3 percent to $829.8 million.
The jump in the company's sales outside North America included a rise of 57.0 percent to $103.9 million in Europe, the Middle East and Africa (EMEA), pushed up by the U.K. and Germany, along with Italy. The regional growth was balanced across the brand's wholesale and retail businesses.
Under Armour's sales soared by 88.9 percent in Asia-Pacific to $93.6 million, driven by China, Korea and Taiwan and with strong demand for running and basketball products. Latin America just about managed double-digit growth, with sales up by 10.4 percent to $38.0 million. Taken all together, international sales were up by 54 percent in constant currencies and they made up 22 percent of Under Armour's turnover for the three months.
This international business remains a costly investment for the company, as it reported operating losses of $4.6 million in EMEA and $8.1 million in Latin America for the quarter. However, Under Armour reaped operating profit of $15.2 million in Asia-Pacific.
It also predicted that the profitability of the European operations would improve significantly this year. It has been impacted by structural changes, as Under Armour is preparing to open an office in France. Last year it decided to terminate a distribution agreement with Alnisa Sport in Spain in order to establish its own office in the country. It incurred extra costs early this year for the switch to a subsidiary in Spain and then some more for the implementation of the ERP system in Europe in the second quarter.
In any case, investments in international markets have become increasingly compelling for Under Armour, due to sluggishness in North America. The group suffered an operating loss in this market as well, reaching $5.4 million, compared with profit of $28.1 million at the same time last year.
The brand's global apparel sales were up by 11.1 percent to $680.6 million for the three months. Footwear sales dipped by 2.4 percent to $236.9 million, although the company emphasized that this came after a sharp rise in the year-ago period. The group's Connected Fitness unit also suffered a sales decline of 2.2 percent to $23.0 million.
Under Armour is clearly considering the brand's expansion into more leisure-oriented products as a means to pump up its footwear business. This would make it less reliant on the popularity of athletes such as Stephen Curry and Jordan Spieth, who fueled a sharp uptick in footwear sales last year.
The brand isn't short of novelties. On the footwear side they include a customized footwear program launched in June and a shoe endorsed by Cam Newton. Under Armour is preparing for the next iteration of Curry-endorsed footwear. The brand's innovation in apparel focuses on lighter and more breathable products, with the Threadborne and Reactor platforms.
The group's wholesale business was up by 3 percent to $655 million, while its retail sales firmed up by 20 percent to $386 million. This shift had a favorable impact on the group's gross margin, but it still contracted by 1.9 percentage point to 45.8 percent for the quarter, due to increased inventory management activities in the North American market, exchange rate changes and extra freight costs. These relate to the launch of its ERP system, which affected the timing of shipments to some key accounts. Under Armour ended the quarter with an operating loss of $4.8 million, compared with operating profit of $19.4 million for the year-ago period, and the net loss landed at $12.3 million, compared with profit of $6.3 million.
The first two quarters of the year yielded a sales increase of 7.7 percent to $2,205 million, with a decline of 0.4 percent in North America. The group revised its guidance downward for the full year, estimating that sales will increase by 9 to 11 percent instead of the previous estimate of 11 to 12 percent.
The gross profit margin should be down by about 1.6 percentage points from 46.4 percent in 2016 as reported, and down by 1.2 percentage points without the impact of restructuring charges. On the same basis, the adjusted operating income should reach about $280 million to $300 million, but with the extra spending the operating income should be between $160 million and $180 million.
