Under Armour (NYSE:UAA) (NYSE:UA) hasn't achieved a growth rebound -- but it's at least headed in the right direction. The sports apparel titan recently revealed improving demand trends and an encouraging uptick in profitability over the holiday shopping season. Management says the hard moves they made in 2018, including aggressive cost cuts and inventory markdowns, have laid the foundation for better results in 2019 and beyond.
CEO Kevin Plank and his team explained their optimism in a conference call with Wall Street analysts, and below are a few highlights from that discussion.
Righting the ship
Our fourth-quarter and year-end 2018 results demonstrate both stability in our business and the emerging strength of our operating model to deliver more consistently for our consumers, customers and shareholders. -- Plank
Under Armour modestly outpaced the holiday-quarter targets that management issued in early December, with international sales growth more than offsetting stubborn declines in the key U.S. market. Sure, its 6% revenue slump at home doesn't look impressive when stacked up against rival Nike (NYSE:NKE) and its 10% increase over the past six months. But management still sees the performance as an important step toward a return to growth, given that revenue dropped 2% in the U.S. this year compared to 5% in 2017 -- all while the company scaled back on price cuts.
The progress, discipline and stability that we are instilling and driving across the organization is taking hold. -- CFO Dave Bergman
Under Armour booked an operating loss of $25 million for the full year, but that negative reported figure obscures major financial improvements behind the scenes. These include sharply reduced expenses courtesy of the restructuring program it just completed. The apparel giant also enters 2019 in a much better inventory position, with holdings having declined 12%. Nike celebrated reaching a similar balance between supply and demand several quarters earlier, but Under Armour's profitability can still benefit from that hard-won posture in 2019 and beyond.
Primed for an (eventual) rebound
We expect revenue to increase approximately 3 to 4% [in 2019], reflecting relatively flat results for North America and a low double-digit percentage rate increase in our international business. -- Bergman
Management made no changes to the initial 2019 outlook they issued in early December that calls for sales growth to slow as profitability improves and the company returns to a pace of generating significant operating income. Still, Plank and his team went into more detail about the regions and product categories that they see leading the way forward.
Specifically, the China geographic region should expand at a high teen percentage rate to mark a slowdown from last year's 27% spike. The apparel and footwear niches should each grow at a low to mid-single-digit pace, too, while its direct-to-consumer business pushes beyond its current mark of 35% of the broader business.
Assuming the year plays out along those general trends, Under Armour should see healthier profits thanks to the combination of lower promotions and reduced costs. Yet it would still lose ground to rivals like Nike.
From there, it's up to the company to demonstrate that it hasn't lost touch with its core consumer by speeding sales growth back up to levels at or beyond those of its peers in the apparel and footwear industries. Management isn't predicting such a rebound in 2019, but executives do think they're at least a step closer to that goal.
"We are in control of our business," Plank said, continuing:
and actively applying the lessons we've learned. We're also acutely aware of just how special the Under Armour Brand is and most importantly, the hard work, choices, and effort is has taken and will take from this team to keep it in reverence for the years to come.