Under Armour, Inc. Disappoints With a Tough Quarter

Under Armour (UA 1.73%) (UAA 1.81%) released weaker-than-expected fourth-quarter 2016 results Tuesday morning, as last quarter's weakness in the North American apparel market intensified. Shares of both classes of Under Armour stock are are down more than 20% as of this writing as the market mulls what this means for the athletic apparel and footwear specialist.

Let's take a closer look at what happened, and what investors can expect going forward.

Under Armour's brand house in Chicago. Image source: Under Armour.

Under Armour results: The raw numbers

Data source: Under Armour. 

What happened with Under Armour this quarter?

• Revenue growth included a 5% increase in wholesale revenue, to $742 million, and 23% growth in direct-to-consumer revenue, to $518 million.
• Gross margin fell 4.2 percentage points, to 44.8%, as inventory management, currencies, and the continued outperformance of the lower-margin footwear and international businesses offset the benefit of more favorable product costs.
• Operating income fell 6.1%, to $166.8 million.
• For the full-year 2016, revenue grew 21.8%, to $4.828 billion, and operating income grew 2.9%, to $420.3 million.
• By comparison, both figures were below Under Armour's latest guidance, which called for 2016 revenue of $4.925 billion, and operating income of $440 million to $445 million.
• By geography:
• North America revenue grew 5.9% year over year, to $1.075 billion.
• International revenue grew 55.2% (60% at constant currency), to $215.3 million, or 16.5% of total sales, thanks to particularly strong growth in the U.K., Germany, China, and Australia.
• By segment:
• Connected fitness revenue grew 7.6%, to $18.3 million.
• Footwear revenue grew 36% year over year, to $228 million, with accelerated growth in both running and basketball.
• Apparel revenue rose 7% year over year, to $929 million, thanks to strength in both golf and basketball.
• Accessories revenue grew 7% year over year, to $104 million, driven by strength in bags and headwear.
• Cash and equivalents at the year's end rose 93% year over year, to $250 million.
• Debt grew 22% year over year, to $817 million.
• Inventory grew 17% year over year, to $917 million.
• Under Armour announced that CFO Chip Molloy has decided to leave for personal reasons. David Bergman, current senior VP, corporate finance, will serve as acting CFO beginning Feb. 3, 2017, and Molloy will remain with Under Armour in an advisory capacity to assist with the transition.

What management had to say

Under Armour founding chairman and CEO Kevin Plank stated:

We are incredibly proud that in 2016, we once again posted record revenue and earnings, however, numerous challenges and disruptions in North American retail tempered our fourth quarter results. The strength of our brand, an unparalleled connection with our consumers and the continuation of investments in our fastest growing businesses -- footwear, international and direct-to-consumer -- give us great confidence in our ability to navigate the current retail environment, execute against our long-term growth strategy and create value to our shareholders.

Looking forward

For the full-year 2017, Under Armour expects revenue to grow 11% to 12% over 2016, which equates to a range of roughly $5.36 billion to $5.41 billion. Under Armour also anticipates gross margin to decline slightly on a year-over-year basis, driven again by a combination of foreign exchange pressure and sales mix. And 2016 operating income is expected to decline approximately 23.9%, to $320 million.

But Plank insisted his company would use this slowdown to solidify its competitive position, stating, "The current environment represents an inflection point to maximize our unique strengths by staying on offense -- investing smartly in innovation, deepening our brand connection with consumers, and amplifying our focus on operational excellence -- positioning Under Armour as a stronger company."

Apart from the continued outperformance of footwear and international growth, this was a painful miss for Under Armour, with little to appease the bears. So while Under Armour's long-term story remains firmly intact, it's hard to blame the market for bidding shares down today.

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