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Under Armour Still Has Work to Do in North America

Stephanie Linnartz’s game plan is starting to pay dividends at Under Armour, but there are still several hurdles she has to overcome — notably how to a turn around the North American business.

Linnartz joined the Baltimore-based activewear company as president and chief executive officer one year ago and has been building her team and implementing a “Protect This House 3” plan that is designed to raise awareness of the Under Armour brand, deliver elevated designs and products to boost U.S. sales and maintain the company’s momentum overseas.

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On Thursday, the company reported third-quarter earnings that came in stronger than expected, posting net income of $114.1 million, or 26 cents a share, for the fiscal quarter ended Dec. 31. The net income figure was impacted by a $50 million earn-out benefit in connection with the sale of the MyFitnessPal platform, the litigation reserve expense and related tax impacts. Without that, the adjusted net income was $84 million.

Adjusted earnings per share came in at 19 cents — much better than the 11 cents analysts projected, according to FactSet. Revenues, however, fell 6 percent to $1.5 billion from $1.6 billion a year earlier.

Under Armour shares were essentially flat on Thursday, down 0.3 percent to close at $7.46.

The outlook for 2024 is an equally mixed picture.

Under Armour is now expecting sales to decline 3 to 4 percent in fiscal year 2024, down from the previous expectation of a 2 to 4 percent dip. But EPS is now expected to be between 50 cents and 52 cents a share, against analyst projections of 49 cents. Operating income is expected to reach somewhere between $287 million and $297 million.

“Despite a mixed retail environment during the holiday season, our third-quarter revenue results were in line with our expectations; we were able to deliver better-than-anticipated profitability and remain on track to achieve our full-year outlook,” said Linnartz. “As we close out fiscal 2024 and our strengthened leadership team begins to come up to speed in the quarters ahead, we are working to reset Under Armour toward a path of improved revenue growth and enhanced value creation in the future.”

Wholesale revenue decreased 13 percent in the period to $712 million, and direct-to-consumer revenue increased 4 percent to $741 million due to a 5 percent increase in owned and operated store revenue and a 2 percent increase in e-commerce sales, which represented 45 percent of the total DTC business in the quarter.

The company continues to struggle in North America, however, where sales fell 12 percent to $915 million, but international revenue increased 7 percent to $566 million because of a 7 percent jump in sales in both the Europe, Middle East and Africa and Asia-Pacific regions, and a 9 percent gain in Latin America.

By category, apparel revenue decreased 6 percent to $1 billion and footwear sales were down 7 percent to $331 million. Accessories revenue was flat at $105 million.

Gross margin increased 100 basis points to 45.2 percent, driven mainly by lower freight costs. However this number was partially impacted by higher sales to the off-price channel and increased promotional activities in the DTC business.

In a call with analysts Thursday morning, Linnartz said despite “a challenging retail environment and consumer buying behavior that was inconsistent market to market,” she believes her strategy is beginning to pay off.

“Following our ‘Protect This House 3’ plan launched last spring, I am pleased with our progress in driving global demand creation and our focus on evolving and simplifying our approach to connecting with consumers. I also feel good about how our efforts are shaping up to deliver elevated design and products to the athletes we serve in nearly 100 countries around the world, strengthening our ability to drive success across our largest growth opportunities in footwear, sports style and our women’s business.”

Turning to the U.S. situation, she admitted the company still has “much more work to do to become a healthier business capable of returning to growth in our largest market. Inconsistency has permeated our U.S. business over the past years in how we go to market across consumers, customers and geographies, how our product is created and delivered with a consistent design language, channel segmentation and how we show up in our owned physical and digital businesses. With a critical mass of work underway, an additional analysis that will yield more work and decision points in the months ahead, we are on right path to addressing these inconsistencies and turning them into strength.”

The biggest issue is within the wholesale arena, where promotional activity impacted the company’s performance, she said on the call. And the company is anticipating markdowns to continue to impact business through the rest of the fiscal year.

Linnartz said the company is also working to improve its North American e-commerce business and is exploring ways to reduce promotional activity and “create a more premium online presence.” And she said the recent addition of Kara Trent as head of the Americas as key to its turnaround plan.

She pointed to the leadership team she has installed at the company since joining as another positive. Two-thirds of the management are new to the company and include executives in product, design, supply chain and communications. Under Armour is still searching for a chief marketing officer.

Yassine Saidi, a 20-year veteran of Puma and Adidas, joined the company last week as chief product officer and will oversee Under Armour’s apparel and footwear, working closely with John Varvatos, who is the company’s head of design. Updated apparel designs will be introduced this spring, including new offerings in the Unstoppable Air Vent for men and the Meridian performance apparel for women. The latter, she said, is leading to strong bookings from wholesale partners.

Linnartz also singled out footwear as “our single most significant growth opportunity.” But with sales down 7 percent in the quarter due to softer demand in North America, she admitted “we have a lot of work to do.” The company is searching for a new head of footwear to evolve the strategies and support long-term growth.

In the near- to midterm, she said, the company will remain focused on cost management and profitability as it continues to “understand where and how we are putting our resources to work to drive the best possible returns…especially in North America.”

There have been some recent wins, she outlined, including the launch of the latest iterations of the Curry basketball shoes as well as a collaboration with Bruce Lee for apparel and footwear. Stephen Curry is a longtime Under Amour ambassador and the company recently signed De’Aaron Fox of the Sacramento Kings as well and will introduce a signature shoe for him later this year.

Regarding the earnings, William Blair said it viewed fiscal 2024 as a “transitional year” for the company and remains “optimistic on the potential for consistent revenue growth alongside ongoing margin expansion beyond fiscal 2024.” But the firm cautioned that Under Armour still needs to maintain a strong brand image and product offering in an industry with intense competition, historically high turnover rates in senior management and majority voting control still held by founder and executive chairman Kevin Plank.

Tom Nikic of Wedbush called the results “surprisingly better-than-expected” and “while there’s still a lot of work to be done, and it will take a while for changes to take hold, we think there’s reason to hope for better days ahead.” He cited the low cost of the stock so the “risk/reward is skewed highly positively if [Under Armour] can put it all together.”

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