What I'm Watching for When Under Armour Reports Earnings

Under Armour (UA 1.54%) (UAA 1.87%) will report earnings before the market opens on Feb. 13. It's been a tough year for the performance apparel company, with revenue growth slowing, gross margins dropping, and the company's largest region (the U.S.) posting declines in the most recent quarter. Here's how management has estimated the company's full-year performance.

When management reports earnings, I'll be watching for signs of inventory left on shelves after the holiday quarter, insights on the plan for growth from the new management team, and whether the direct-to-consumer and international segments are performing as expected.

Holiday quarter sales

It was a year ago that Under Armour's trend of 26 quarters of 20%-plus revenue growth came to an end. The Q4 2016 report disappointed investors with 12% top-line growth. But more important, broad discounting in the U.S. retail market impacted the company's margins and left excess inventory at retail outlets. While the company doesn't share the level of its inventory in the channel, it ended up taking a $20 million inventory writedown in Q2 2017, which points to challenges in getting the right product in front of customers.

Chicago Under Armour Brand House store. Image source: Under Armour.

CEO Kevin Plank and CFO Dave Bergman were interviewed at a Goldman Sachs retail conference in September and explained how this year would be different. Improvements focused on changes in product selection and supply chain efficiencies to ensure the right products were available and priced right for customers. At the time, Plank and Bergman hinted that the company could hit a 20% growth number for the quarter, but management has since backed off that projection.

I'll be listening for signs that the company was able to execute on its plans to achieve revenue growth without significant discounting or inventory left on retailers' shelves.

New team; new growth plans

Under Armour hired 30-year industry veteran Patrik Frisk as its president and COO in June. After Frisk was brought on board and the company posted disappointing results in the third quarter, there has been a changing of the guard in key executive roles. With a new management team in place, Frisk has laid out a plan to fulfill his job responsibility to "lead the  company's go-to-market strategy and the successful execution of its long-term growth plan." The plan is basically to improve speed to market and supply chain execution to deliver great products customers will buy.

Frisk's plan is not significantly different than what Nike is doing with its supply chain improvements to make a more responsive product-fulfillment engine to meet increasing customer expectations of personalization and speed of delivery. The difference is, Nike is executing its strategy already and has a number of wins under its belt. I'll be watching for more details on how Frisk and the management team plan to overhaul its go-to-market engine while continuing to maintain brand relevance with customers.

2 growth engines still humming?

Under Armour's international and direct-to-consumer segments have been bright spots. These two businesses posted 35% and 15% growth, respectively, in the most recent quarter. Bergman indicated that international is expected to be up "greater than 50%" this quarter, easily eclipsing $1 billion in revenue for the fiscal year. International expansion is crucial to the company while it manages the challenges of its U.S. wholesale business.

Direct-to-consumer accounts for a third of the company's revenue, but it's hard to understand how much of this revenue comes from what source. It's a mix of online, Under Armour apps, its full-price retail stores, and its discount factory stores. Regardless, good growth in this segment shows that the Under Armour brand is still strong.

I'll be watching that these two growth engines don't have their "check engine" light on. Weakness in one or both could point to issues with brand image or product that aren't easily fixed.

While this quarter isn't make-or-break for the company, it's certainly an important check-in to see if it can weather the current storm and emerge stronger. With customers having more options than ever on where and how to buy performance sporting apparel, I'll be looking for signs that the company is improving its operations to ensure that customers will come back to its brand again and again.