Athletic retailer Sports Authority announced in early 2016 that it was in financial trouble, and by March the company declared a full bankruptcy, with plans to liquidate assets and close 140 stores. Sports Authority has been one of Under Armour's (NYSE:UAA) (NYSE:UA) largest retail partners, and because of the bankruptcy, Under Armour estimated that it would receive about a quarter of the sales it originally planned from the retailer this year.
Under Armour earnings take a hit
Under Armour stock slid backwards at the end of June, as second-quarter earnings came in 58% lower than a year ago at just $6 million. Even though revenue grew 28% year over year, above expectations, and Under Armour announced new partnerships and growth opportunities, the stock still dropped nearly 10% over the next few days.
Much of the reason for the earnings drop was due to the Sports Authority bankruptcy and the $23 million operating profit impairment Under Armour took because of it this quarter. However, the Sports Authority bankruptcy isn't the only reason for Under Armour's earnings to be as low as it is. Some of the earnings drop was due to investments Under Armour is making in its long-term vision aimed at keeping sales growing rapidly for years to come.
2 ways Under Armour is growing past Sports Authority
The Sports Authority bankruptcy's impact to earnings was significant this quarter, but the long-term investments Under Armour is making in owning its own channel and diversifying its retail partnerships will easily make up for it. Here's how.
1. Direct-to-consumer sales growth. Under Amour's direct-to-consumer sales, those online or at its brand stores, grew by 28% year over year to $321 million, or about a third of total sales. Direct-to-consumer sales are much more profitable than those through third-party retailers, since Under Armour gets to keep the percentage of the sale that would otherwise go to the retailer. It also helps Under Amour keep better control of its product and customer experience.
Under Armour is continuing to invest in growing its direct-to-consumer sales. One way Under Armour is doing that is through UA Shop mobile app released in June. The shopping app has been "built on the Under Armour Connected Fitness platform," meaning that it connects to Under Armour's various other activity-tracking apps to pull data from the now more than 175 million Under Armour-owned fitness app users to create a deeply personalized shopping experience and increase sales.
2. New retail partnerships. The other reason to be less concerned with Sports Authority's bankruptcy is that Under Armour is already actively diversifying its retail partnerships, both within the specific athletic space and in fashion retail.
Under Armour announced this quarter a new partnership with Kohl's (NYSE:KSS). While some analysts are skeptical of a high-end athletic brand like Under Armour in a mid-tier department store like Kohl's, consider the impact this could have to diversifying Under Armour's consumer base further, especially in the women's category, which Under Armour CEO Kevin Plank noted is a high-growth area the company is focused on.
"This decision to reach new consumers through Kohl's is not a channel consideration, but a consumer consideration," Plank said. Under Armour's gear will be available in Kohl's stores beginning early next year, starting in about 600 Kohl's stores.
This and similar partnerships will also become very important as Under Armour launches its Under Armour Sportswear (UAS) gear this fall. "UAS is not just a category play or distribution play," Plank said during the earnings call. "It's about bringing a new consumer into the Under Armour brand. UAS will bring a young, fresh, and modern voice to sportswear, and reflects the insights we've gained as a performance brand now applied to the every day wardrobe." Expect to see button-down shirts with elastic sleves and other professional wear with a sportswear touch.
A speed bump on an otherwise fast track
While the stock has regained some ground since its sell-off following the Q2 earnings miss, the same thing could very well happen in Q3 and the full year 2016. Investors should stop worrying.
These moves toward direct-to-consumer growth and retail diversification were not reactionary; they were investments being made long before Sports Authority announced its financial issues. Because of these investments and many others, Under Armour still looks on track to reach its $7.5 billion sales goal by 2018, with plenty of room to go even further.