There's no question: Under Armour Inc. (UA 0.16%) (UAA +0.31%) is a growth-oriented company that has seen revenue rise from $2.3 billion to $4.8 billion over the last three years, a more than 100% increase. Understandably, such rapid growth has both attracted investors and also set high expectations for the company. So when Under Armour this month reported a second-quarter revenue increase of just 9% -- accompanied by a $12 million net loss -- some investors dropped Under Armour faster than a hot potato.
Yet shareholders should consider that Under Armour is still reporting strong growth internationally and in some categories. Additionally, management is laying strategic groundwork to maximize future revenues in those areas. Let's take a look.
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Growth by region
One of the primary reasons Under Armour reported just a 9% increase in second-quarter revenue is because its largest market, North America, saw tepid growth in this time frame. Chief Financial Officer David E. Bergman said during the conference call with analysts that "the dynamic and promotional retail environment in North America tempered results to be in line with last year's same period." In other words, competition was stiff so Under Armour had to cut prices to move product. Given that North America contributed 76% of Under Armour's second-quarter net revenues, it makes sense that stagnating sales in this market have an outsized impact on the top line.
Yet international markets have been growing and contributing a larger piece of the pie every year since 2013. Back in 2013, international sales represented just 5.9% of revenues. By comparison, in 2017's second quarter, total international sales grew 57% to $235 million, contributing 22% of total revenue. The Asia-Pacific region led the way, with sales up 89% from the prior-year quarter. The EMEA region, which includes Europe, the Middle East, and Africa, increased by 57%, followed by Latin America, up 10%.
| Region | Q2 Revenue (in thousands) | % Change (YOY) | Q2 2017 % of Total | Q2 2016 % of Total |
|---|---|---|---|---|
| North America | $829,805 | 0.3% | 76.3% | 82.6% |
| EMEA | $103,896 | 57% | 9.5% | 6.6% |
| Asia-Pacific | $93,574 | 88.8% | 8.6% | 5% |
| Latin America | $38,001 | 10.4% | 3.5% | 3.4% |
| Connected Fitness | $22,969 | (2.2%) | 2.1% | 2.3% |
Connected Fitness is Under Armour's digital platform that includes apps including MapMyFitness and MyFitnessPal.
Management seems confident that one international market in particular will continue to deliver top- and bottom-line growth for Under Armour. Bergman stated in the second-quarter conference call that "when you break it down by region, Asia-Pacific has been really strong for us ... And it's also one [region] that's becoming the most profitable for us. So the combination of that high-growth rate and the higher profitability and fairly decent gross margins there is really giving us some momentum on the bottom line." This is a great sign, especially if management can continue growing the Asia-Pacific region at its current pace.
Growth by category
Looking by category, Under Armour has posted some encouraging gains in accessories revenues. Bergman reported that they "increased 22% to $123 million in the quarter, with solid results from men's training, women's training and youth performance." This $123 million represented 11% of the company's revenues, up from 10% in the prior-year quarter and 8% in total fiscal 2016. Under Armour accessories include things like winter hats and gloves, socks, belts, and duffle bags.
And while many investors were discouraged by the 2% decrease in revenues coming from footwear in the most recent quarter, management still believes this category holds ample potential for growth. Chairman, CEO and founder Kevin A. Plank stated that "... footwear remains, frankly, our largest opportunity ... having our footwear engine intact and having it ready to run for us is where our company has been focused." Specifically, management expects the launch of several new models of footwear -- the Bandit 3, the Threadborne Push for women, and the Curry 4 -- to drive performance within the category during the second half of 2017.
One final point to consider is that Under Armour has recently restructured itself to support category management. In this case, category management refers to leaders being assigned to the running business, the women's business, the basketball business, and others. This means categories will be managed -- and strategically grown -- at a more granular level.
What can investors expect?
For now, investors can remain cautiously optimistic as the company pursues growth opportunities in international markets and within important categories such as footwear. There are several large question marks around the issues of whether Under Armour will be able to continue its rapid growth in the Asia-Pacific region, and whether footwear will be able to regain momentum. Yet it's evident from the second-quarter conference call that management has its eye on the ball -- with the ball being what Plank termed a "stronger, faster and smarter" company -- and is laying the groundwork for improved top- and bottom-line growth.
