Under Armour turned in yet another sharp increase in turnover for the third quarter, fueled by surging international and footwear sales, but the group's chief executive, Kevin Plank, explained that the company was over-investing in several aspects of its expansion to gain market share and move toward annual sales of $10 billion.
Under Armour's sales were up by 22.2 percent to $1,471.6 million for the quarter, which was a rise of 23 percent in constant currencies. Apparel sales moved up by 18.0 percent to $1,021.2 million, led by training, golf and team sports. Footwear sales increased by 42.1 percent to $278.9 million, as Under Armour continued to flesh out its offering and build up sales at higher price points.
The unfavorable situation in the U.S. market hasn't hurt Under Armour as much as others; its sales in North America moved up by 16 percent for the quarter. However, that was a far cry from the 73.7 percent rise in international sales to $226.2 million. It amounted to an increase of 80 percent in constant currencies, and sales outside of North America reached about 15 percent of the group's turnover.
Sales are advancing briskly in Europe, the Middle East and Africa (EMEA), where Under Armour is adding distributors as well as wholesale partners and own retail stores. Yet Plank was most upbeat about the brand's growth in China, on the back of a recent Asian trip. Under Armour has also been investing in other markets, such as Mexico, Chile, Australia and New Zealand, where online sales platforms were launched.
Under Armour's wholesale business was up by 19 percent to $1.0 billion, while retail sales shot up by 29 percent to $408 million. The North American store count reached 162 company-owned stores at the end of the quarter, while the international business included 282 partner stores and 63 own stores.
Plank emphasized in the call that there was still plenty of potential for the brand in the U.S. market. This includes the launch of sportswear, which appeared at the New York Fashion Week. The upside is substantial, Plank suggested, and Under Armour has just started.
When it comes to footwear, the brand is already nearing sales of $1 billion for the year. Under Armour focuses on sales of products retailing at more than $100, aided by models such as the Bandit 2 and the Slingride. The group's target is to have more than 50 percent of its volume in running footwear over $100 by next spring. Plank said that the brand's footwear market share nearly doubled for deliveries from July through September, based on industry data. Another area with strong potential is women's footwear, It has already made strong inroads in the women's sports apparel market, as Plank said that women's segment had turned into a $1 billion business.
The group's gross margin for the quarter reached 47.5 percent, down by 1.3 percentage points, due to unfavorable shifts in the timing of liquidations, more discounting and negative impact from exchange rate changes. Under Armour's operating profit crawled up by 0.6 percent in North America but it more than quadrupled in international markets to $25.0 million, adding up to an increase of 16.3 percent to $199.3 million. The group ended the quarter with net income of $128 million, up by 28 percent.
Under Armour continues to forecast sales of about $4,925 million for the year, which would be an increase of about 24 percent. The growth for the fourth quarter alone is estimated to reach about 20 percent. The group's gross margin is predicted to contract by 0.8 percentage points and the operating profit should reach between $440 million and $445 million, up by 8 to 9 percent for the year.
The group is moving toward its target of reaching sales of $7.5 billion in 2018, predicting sales increases in the low twenties in the next two years. At the same time, the group forecasts operating income growth in the mid-teens for each of the next two years as it focuses on investment “to get big fast.” The point is that, once it reaches sales in the range of $10 billion, the operating income margin should start to rise.
Plank explained at length during the call that Under Armour was at a pivotal time in its development. He said that shifts taking place in the production of footwear and apparel, along with the changes in the way consumers buy products, are leveling the playing field and helping Under Armour to build up its brand.
The targets for investment include the development of footwear and international distribution, but the brand is also aiming to expand fast in the U.S. market. Under Armour is adjusting to the retail situation and preparing to explore more potential through an agreement with Kohl's, which will carry Under Armour from next year. The brand is investing in offices, IT systems and distribution capacity.
Another item for investment is connected fitness. That part of the business reached sales of just $20.2 million and it suffered an operating loss of $8.5 million for the quarter, but Plank was adamant that it would be crucial to learn more about consumers and to be pro-active in pushing products to them. Plank said the group's connected fitness unit was nearing its 2016 target of 190 million registered users.
Separately, Under Armour provided some details on Lighthouse, its manufacturing innovation project, during the Fashion Forward conference organized in Bordeaux by Lectra. The Lighthouse is a facility opened in Baltimore in June that aims to take advantage of innovation in production, particularly in local-for-local manufacturing and customization. The group reportedly has plans for a second center, and for the launch of several contract factories next year.
The Lighthouse facility works alongside partner companies, institutions and academics. Under Armour wants to develop new technologies that will be integrated into the company's existing supply chain by its current partners, and then used in new facilities. Plank has long argued that footwear manufacturing, in particular, has not substantially changed its processes for several decades. Under Armour's Lighthouse should help to change the dynamics.