As expected, Under Armour reported its first loss since going public, although it was lower than what analysts had expected. It amounted to $2,272,000 for the period compared with a net profit of $19,180,000 in the same quarter a year ago. The gross margin fell by 0.7 percentage points to 45.2 percent because of heavy markdowns and a less favorable regional and product mix, plus currency headwinds. The operating margin fell as much as 2.7 percentage points to just 0.7 percent due to stronger investments in its direct-to-consumer (DTC) business and its international expansion.
Total revenues increased by 6.6 percent to $1.12 billion, driven by the company's international expansion. They fell by one percent to $871 million in North America, in the wake of recent retail bankruptcies in the U.S., but they were up by 52 percent in the rest of the world, with a 57 percent increase in local currencies, and they came to represent 20 percent of the total turnover.
Sales went up by 55 percent in Europe, the Middle East and Africa (EMEA) to $103 million, but operating earnings in the region fell by 44 percent to $1,629,000. They rose by 60 percent in Asia-Pacific to $85 million and by 30 percent in Latin America to $38 million.
| Under Armour Consolidated Income Statement | |||
| ($ thousand, Quarter ended March 31) | |||
| 2017 | 2016 | % | |
| North America | 871,271 | 880,595 | -1.1 |
| EMEA | 102,855 | 66,267 | 55.2 |
| Asia Pacific | 85,818 | 53,622 | 60.0 |
| Latin America | 38,454 | 29,467 | 30.5 |
| Connected Fitness | 18,933 | 18,501 | 2.3 |
| Total revenues | 1,117,331 | 1,047,702 | 6.6 |
| Cost of goods | 611,908 | 567,066 | 7.9 |
| SG&A | 497,887 | 445,753 | 11.7 |
| Net interest expense | 7,820 | 4,532 | 72.6 |
| Other expense | 2,570 | 2,702 | -4.9 |
| Pre-Tax | 2,286 | 33,053 | -93.1 |
| Tax | 4,558 | 13,873 | -67.1 |
| Net Income (Loss) | (2,272) | 19,180 | - |
| Euro/Share (Diluted) | (0.01) | 0.04 | - |
The Asia-Pacific region, where UA's sales were driven by progress in China and Australia and the takeover of the distribution in South Korea, also delivered a 13 percent improvement in operating income, in contrast with a 91 percent slump in the operating profit of the North America region and a small operating loss in Latin America.
In the company's Connected division, sales rose by 2.3 percent to $18.9 million and operating losses declined by 42 percent to $9.6 million. However, the division has begun to offer better insights on consumer behavior for the company's product development efforts through the implementation of a project with SAP.
Across all regions, wholesale revenues rose by 4 percent, but the DTC business continued to gain ground rising by 13 percent to $302 million, closer to half of the total turnover.
Total apparel sales grew by 7.3 percent to $715 million, with particular strength in training, golf and team sports. The best categories in footwear were golf, women's, training and running – not basketball.
Footwear went up by only 2.0 percent to $270 million in the quarter because of a tough comparison with the year-ago period, when the category had jumped by 64 percent for the brand, and softer-than-expected sales of the Curry 3 line of basketball shoes.
Sales of accessories rose by 11.8 percent to $89 million, driven by products in the training, running, youth and global football categories. Licensing revenues jumped by 24.6 percent to $24 million thanks to strong sales of socks and higher sales by its partner in Japan.
The management is keeping its guidance for the full financial year, projecting an operating income of around $320 million on sales of nearly $5.4 billion, although there will likely be a loss also in the second quarter. This implies a sales increase of between 11 and 12 percent for the year, or between 12 and 13 percent in local currencies. There should be a slight decrease in the gross margin to 46.4 percent due to a higher proportion of revenues generated by footwear and by international sales, which carry lower margins.
Observers have blamed UA for a lack of innovative products recently, but the company is preparing some new releases in both apparel and footwear later this year. UA's stock market capitalization has fallen by almost one-third of its value so far this year. One of the reasons may have been Adidas' rapidly growing market share in the U.S. and strong competition from Nike, as the growth of the athletic footwear market has been shifting from performance sports shoes to casual and retro styles.
UA is still far from its goal of doubling its annual turnover to $10 billion, although it still has much room to grow outside the U.S. Puma's recent strong momentum, particularly in the U.S. right now, is another challenge that UA is facing. With guidance for indicative sales of $4.4 billion this year, the Cat may be catching up with the N° 3 sports brand in the world.
