Under Armour returned to growth in North America and managed an ample sales rise in international markets in the second quarter, but its profitability was impacted by restructuring measures. The company has identified additional cutbacks and investments worth about $80 million, which should raise restructuring and related charges to between $190 million and $210 million for the full financial year.
Overall sales rose by 7.7 percent to $1,174.9 million in the second quarter, up by 7 percent in constant currencies. The restructuring measures taken in the quarter had a negative impact of $6 million on the gross margin, which was down by 1.1 percentage point to 44.8 percent, while the adjusted gross margin reached 45.3 percent. With restructuring and impairment charges of $78.8 million, Under Armour suffered an operating loss of $104.9 million, and its adjusted operating loss amounted to $20 million. It ended up with a net loss of $95.5 million, and without restructuring charges its income was still negative at $34 million.
Kevin Plank, Under Armour's chief executive, said in a conference call with analysts that the company has continued to tackle under-performing areas, cut back on infrastructure investments that were beyond its growth, improve distribution and right-size inventory, while putting more resources behind digital development, retailing and international business. It has made cutbacks in marketing as well, such as its decision to step away from the Major League Baseball deal in 2020, and intends to close some North American brand stores.
Under Armour acknowledged that much work remained to be done but the company is starting to benefit. While inventories were up by 27 percent at the end of March, the growth was reduced to 11 percent at the end of June, and the group is projecting an increase at a low single-digit rate by the end of 2018. Its supply chain and its ability to buy adequately are becoming more efficient, after the implementation of an ERP system upgrade last year and other moves to reduce lead times by five months to 16 months. The company is rationalizing its supplier base and expecting to at least halve its number of SKUs between 2017 and the second half of next year. The measures should start to have a stronger impact in the spring of 2019, accelerating thereafter.
Training and running were key categories behind a 9.8 percent jump in apparel sales to $747.3 million. Running and team sports performed most strongly in footwear, for which Under Armour reported a 14.5 percent sales rise to $271.4 million. But sales of accessories slumped by 13.6 percent to $105.9 million.
The Hovr Phantom and Sonic running footwear were among the strongest launches for Under Armour so far this year, along with Project Rock, the Misty Copeland training range and the Curry 5 basketball shoe.
Under Armour's own retail sales amounted to 35 percent of its turnover for the quarter. They moved up by 7 percent to $414 million, while its wholesale business firmed up by 9 percent to $710 million. But this was driven by inventory management initiatives, including increased sales to the off-price channel.
After several sluggish quarters in North America, Under Armour managed a regional sales increase of 1.6 percent to $843.4 million, up by 1 percent in constant currencies. This was slightly better than projected, due to extra inventory management actions and improved service.
The group's international sales altogether increased by 28 percent to $302 million for the quarter. They were up by 24 percent in constant currencies, with solid gains across all regional markets.
Europe, the Middle East and Africa (EMEA) generated a 30.8 percent sales hike to $135.9 million. Regional sales were up by 25 percent in constant currencies, with growth across distribution channels and particular strength in the British, German and Spanish markets. But Under Armour's regional managing director since May, Massimo Baratto, has taken the leadership of a business that remains loss-making. Its loss from operations reached $10.1 million for the three months, compared with $4.6 million in the year-ago period.
Latin America produced a sales increase of 7.3 percent to $40.8 million, up by 12 percent in constant currencies. But this relatively small business generated an operating loss of $21.8 million, more than twice the loss of $8.1 million in the prior year quarter. The company said it was revising its mix of partners and switching from a subsidiary to a licensing partnership in Brazil. Under Armour said it had struggled with the economic circumstances in Brazil and it hadn't fully built up a local supply chain. The licensing deal should reduce the volatility of the Brazilian business and increase its profit margin.
Asia Pacific was the only regional market that produced an operating income as it brought in $18.7 million for the quarter, up from $15.2 million. Sales in Asia Pacific gained 34.3 percent to $125.7 million, up by 28 percent in constant currencies. China, Korea and Australia strongly contributed to the growth, which was balanced across wholesale and retail distribution. The company raised its stake in its Japanese licensing partner to 29.5 percent, as part of a contract renewal. This explains an outlay of $39.2 million for a purchase of equity method investment in the quarter.
The connected fitness division brought in sales of $29.1 million, which was an increase of 12.3 percent, and it managed an operating income of $1.6 million, compared with a loss of $1.9 million for the same quarter last year.
Under Armour's sales gained 6.7 percent to $2,360.2 million for the first six months of this year, with a rise of 0.6 percent in North America and double-digit rate increases in other markets. They ranged from 27.1 percent in EMEA to 34.5 percent in Asia-Pacific and 14.1 percent in Latin America, while connected fitness sales jumped by 22.3 percent. The group's operating loss reached $133.5 million, after restructuring and impairment charges of $116.3 million. They led to a net loss of $125.8 million for the six months, after a loss of $14.6 million for the year-ago period.
Under Armour is projecting a sales increase of about 3 percent to 4 percent for the full year, combining a low to mid-single digit decline in North American with international growth above 25 percent. Apparel is anticipated to generate sales growth at a mid-single-digit rate, while footwear should deliver a low single-digit sales rise and accessories should decline at a low single-digit rate.
The group anticipates that its gross margin will be flat to down slightly compared with 45.0 percent in 2017, but its adjusted gross margin should improve slightly. Under Armour's operating loss is projected to reach between $50 million and $60 million in 2018. Excluding the impact of the restructuring measures that would amount to an operating income of between $130 million and $160 million. Adjusted diluted earnings per share are expected to be in the range of $0.14 and $0.19 for the full year. Under Armour will hold an investor day on Dec. 12 in Baltimore.
