After losing 33.1 percent of its market capitalization in the course of 2016 (see our previous issue), Under Armour is having a difficult start to 2017, after releasing weak fourth-quarter results, cutting its revenue guidance for the year and announcing the departure of its chief financial officer. It blamed “numerous challenges” and disruptions in the North American retail environment for its weaker-than-expected performance in the last three months of 2016. The company's revenues still increased by 12.0 percent over the year-ago quarter to $1.3 billion, but they fell below Wall Street's average target of $1.41 billion.
The suddenly slower growth was driven by an increase of 5.0 percent in wholesale revenues to $742 million and an increase of 23.0 percent in direct-to-consumer revenues to $518 million. In North America, sales were up by 6.0 percent, a rate of increase that was significantly lower than in previous quarters for the region. The company had previously reported growth levels above 20 percent for 25 consecutive quarters until the third quarter of 2016, when sales started to slow down in the region.
However, the group's international business grew by 55.0 percent - or by 60.0 percent on a currency neutral basis – in the quarter, driven by significant growth in the U.K., Germany, China and Australia.
The apparel segment saw revenues go up by 7.0 percent to $929 million, led by strength in golf and basketball. In the footwear segment, sales jumped by 36.0 percent to $228 million, primarily reflecting the continued success of the basketball category, led by the Stephen Curry signature basketball line, as well as growth in running. The accessories segment rose by 7.0 percent to $104 million, largely due to growth in bags and headwear.
On the other hand, the consolidated gross margin dropped by 3.2 percentage points to 44.8 percent, reflecting changes in foreign currency, efforts to manage inventory and the out-performance of footwear and international businesses in the overall mix, which carry lower margins than apparel and the North American business.
Net income decreased by 0.9 percent to $105 million, with diluted earnings per share of 23 cents, compared with Wall Street's consensus estimate of 25 cents.
For the full financial year, Under Armour's revenues were up by 22.0 percent to $4.8 billion, or by 23.0 percent on a currency-neutral basis. This included an increase of 19.0 percent in wholesale revenues to $3.1 billion and an increase of 27.0 percent in direct-to-consumer revenues to $1.5 billion.
Sales rose by 16.0 percent in North America for the year, and they soared by 63.0 percent in the rest of the world, with a 69.0 percent increase in local currencies. Overall, international revenues came to represent 15.0 percent of total revenues, up from 11.0 percent in 2015.
In the apparel segment, full-year sales went up by 15.0 percent to $3.2 billion, driven by growth in golf, basketball and training. Revenues in the footwear segment jumped by 50.0 percent to $1 billion, with balanced growth across all categories, led by running and basketball. Sales in the accessories segment increased by 17.0 percent to $407 million, reflecting growth in bags and headwear.
The gross margin was down by 1.6 percentage points for the year to 46.5 percent for the same reasons that affected it in the last quarter. The annual net earnings grew by 11.0 percent to $259 million.
Along with the results, the company announced that its chief financial officer, Chip Molloy, has decided to leave the company due to personal reasons, after only one year in office. Effective Feb. 3, David Bergman, senior vice president, is replacing him on an interim basis.
The company also cut its 2017 revenue guidance significantly. Sales are now forecast to grow by between 11.0 and 12.0 percent to reach nearly $5.4 billion, instead of a previous guidance expecting growth to be in the low 20s. The gross margin is expected to be slightly down as compared to the prior year.
The new forecast, along with the weaker-than-expected revenues in the fourth quarter of 2016 and the CFO's departure, caused analysts to remain cautious about the growth prospects of Under Armour, leading to significant pressure on the stock.
Charging “weak operational execution” by the company and mentioning growing competition in its home market, Standard & Poor's lowered its credit rating from BBB- to a speculative-level BB+ status. Moody's Investors Service kept its ratings for UA but changed its rating outlook from stable to negative.
