Under Armour has launched extra restructuring measures, after a year that was marked by much-reduced sales expansion and the re-alignment of the company's management and cost structure.
Its performance somewhat improved in the last quarter, as sales increased by 4.6 percent to $1,365.4 billion, a rise of 4 percent in constant currencies. North American sales tumbled by 4.5 percent while international sales surged by 47 percent.
Europe, the Middle East and Africa (EMEA) contributed a sales rise of 45.5 percent for the three months. The quarter saw the opening of Under Armour's first European flagship store and the appointment of Massimo Baratto as managing director for Europe, from the end of April 2018.
But Under Armour's sales came just short of $5 billion in 2017, as they moved up by 3.1 percent to $4,976.5 million. North American sales dropped by 5.1 percent to $3.8 billion for the year, but international sales soared by 46 percent to surpass the $1 billion mark, making up 22 percent of Under Armour's turnover.
Kevin Plank, Under Armour's chief executive, said in a conference call with analysts that international sales quadrupled in the last three years and that this business started to deliver more meaningful returns on the large investments made in recent years.
EMEA brought in a sales increase of 42.2 percent to $470.0 million for the year. Under Armour said it gained traction with wholesale partners and its own stores, which helped to raise regional profit margins.
Under Armour's sales in Asia-Pacific shot up by 61.4 percent to $433.6 million. It expanded most rapidly in South Korea and China but it appears to have plenty more potential. The brand has stores in more than 60 Chinese cities, most of them in the top tiers. It just opened its largest Asian store, covering over 20,000 square feet in Beijing.
Latin America remained the smaller regional market, as sales moved up by 27.9 percent for the year to $181.3 million. Sales were up across wholesale and retail activities, with the largest markets including Mexico, Brazil and Chile.
Under Armour's wholesale business was down by 3 percent to $3.0 billion for the year, due to sluggishness in the U.S. market. Its retail sales jumped by 14 percent to $1.7 billion, to make up 35 percent of global sales. The company raised its turnover by 2 percent in apparel, 3 percent in footwear and 10 percent in accessories.
Under Armour's gross margin was down by 1.4 percentage points to 45.0 percent for the year, as it moved to clean up inventories. The decline includes an impact of $5 million from restructuring efforts.
The company' selling, general and administrative expenses went up by 14 percent, due to continued investments in marketing, retailing and international development. Plank said there was some progress in slowing down the growth, but he was unsatisfied that the expenses amounted to 45.1 percent of sales, and made it clear that he wanted to reduce that level to below 40 percent.
The operating profit was further reduced by restructuring and impairment charges of $124 million in 2017. The group announced in August that its restructuring plans would include about $140 million to $150 million in restructuring, impairment and related charges, most of that in 2017.
Under Armour explained that it had invested for faster growth, but this had created some inefficiencies and there had been a mismatch between the cost structure and the company's size. The issues were compounded by the situation in the U.S. retail market, and intensified competition.
Under Armour switched to category management seven months ago, and it simplified other aspects of its go-to-market strategy. The aim is to switch from a two-season calendar to a quarterly program, with adjustments that should be fully in place in early 2020. The company has further optimized its product range, meaning that the number of items should be reduced by 30 percent to 40 percent in the second half of 2019 as compared with the 2017 range.
Under Armour ended the year with a net loss of $48.2 million, but that would have been a profit of $87 million without the impact of the restructuring measures and a one-time charge relating to tax reforms, compared with profit of $198 million in 2016.
Along the same lines as in 2017, Under Armour anticipates growth at a low single-digit rate this year. Its sales should drop at a mid-single digit rate in North America, combining contraction in its wholesale business with expansion in retailing. The international business is expected to grow at more than 25 percent.
The gross margin should increase by about 0.5 percentage points, primarily due to more own retail sales, changes in currency exchange rates and low product costs. Promotional activity should be lower in the second half of the year, compared with the same period in 2017.
Under Armour said it wanted to become a louder brand in 2018, permanently engaging with consumers and on an international scale. It has done so for the first time with the global launch of HOVR, featuring a midsole technology that Under Armour wants to turn into a franchise. The HOVR range includes connected shoes, allowing users to log their runs and sync with fitness and running apps owned by Under Armour. It even opened a dedicated HOVR store in Los Angeles around the NBA All-Star game.
Under Armour has conducted a global segmentation study aiming to involve more than 20,000 people, to gain more understanding of consumer motives. It intends to focus more sharply on men's training, running and women's training, signaling a stronger focus on performance.
The extra restructuring measures should create up to $105 million in cash-related charges, consisting of up to $55 million in facility and lease termination and other restructuring charges, and up to $25 million in non-cash charges. The efforts in 2017 and this year are anticipated to generate at least $75 million in annual savings in 2019 and beyond.