It wasn't too long ago that Under Armour (UA 1.73%) (UAA 1.81%) shareholders could easily find reasons to be optimistic in the run-up to the retailer's quarterly earnings reports. Up until late 2016, after all, the company had boosted sales at a more-than-20% pace for 25 consecutive quarters. Under Armour frequently trounced management's expectations on both the top and bottom lines, too.
That's not the mood as we approach the fourth-quarter report that's due out on Tuesday, Feb. 13. Instead, investors are bracing for weak sales and falling profitability over the holiday season. There's also a decent chance the sports apparel giant will issue a bleak forecast for 2018, given that it had to dramatically lower its 2017 outlook in late October.
Let's take a closer look at what investors can expect on Tuesday.
Image source: Getty Images.
The U.S. retailing nightmare
Three months ago, CEO Kevin Plank and his team described a brutal selling environment in the U.S. market where retailer bankruptcies, weak customer traffic, and aggressive discounting sent sales down 12% even as profit margins dove. Management warned that it didn't expect these conditions to improve over the holidays, either.
That pessimistic forecast was probably right. Rival Nike (NKE -1.26%) in late December revealed a slight worsening of demand trends in the U.S market as sales declined 5%, compared to a 3% drop in the prior quarter. The footwear titan's gross margin shrank by 1.2 percentage points, too.
Look for Under Armour to post significantly weaker results than Nike did in this segment. Its inventory position was worse heading into the key holiday shopping period, after all. And that challenge has been amplified by logistical issues stemming from the company's switch to a new enterprise resource planning system. Thus, another double-digit sales drop in the core U.S. market is likely, along with about a 2-percentage-point drop in profitability that reflects continued price-cutting.
Bright spots
Under Armour's international business has been a rare bright spot, consistently edging past expectations over the past year even as the U.S. division deteriorated. The overseas segment grew sales at a 34% pace in the most recent quarter and is on track to expand by 50% for the full 2017 year.
It's no surprise that, with the U.S. market getting worse, Under Armour and Nike have both pinned their hopes on international geographies to deliver much of their growth over the short term. That's especially true for China, which helped Under Armour's Asia-Pacific region log a 50% sales boost last quarter. Nike estimates that the country will grow to 10 times the size of the addressable market in the U.S. over time, and that leaves plenty of room for both companies to succeed there.
A cautious outlook
Under Armour gets far more of its business -- around 80% compared to Nike's 20% -- from the struggling U.S. market. And that reliance could translate into a disappointing outlook for fiscal 2018. Nike has forecast improving trends in both sales and profits over the next few years. The retailer is even optimistic that conditions in the U.S. will stabilize in the coming months, with help from its most aggressive pipeline of new product introductions to date.
I wouldn't expect Under Armour to issue such a confident 2018 forecast on Tuesday. If anything, Plank and his team might predict roughly flat sales and another reduction in gross margin. This cautious outlook would likely reflect the brutal selling environment in its core market. It would also protect the company from having to reduce its forecast following surprisingly weak results, as it was forced to do twice in 2017.
