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Can Under Armour Turn Around Its North American Business?

By Jennifer Saibil - Feb 14, 2020 at 12:27PM

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The athletic wear brand offered up a disheartening 2020 outlook for domestic sales. What does that signal for the future?

Under Armour (UA 2.19%) (UAA 5.39%) released its 2019 fourth-quarter earnings this week, and while global revenue increased, the overall 2020 outlook looks grim.

The main drag on sales is still the North American market, where the company is headquartered and where it's taken a beating over the past few years. In late 2019, the company announced a new CEO, and in early 2020 it rolled out a broad, new marketing strategy. But Under Armour isn't where it wants to be just yet, as improved results are taking longer than anticipated to take root.

Revenue for the quarter was up 4% to 1.4 billion, and North American revenue was growth positive for the first time since the second quarter of 2018. Operating income was $74 million, as compared to a loss of $10,447 in 2018. Net income was a loss per share of $0.03. Direct-to-consumer (DTC) sales increased 2% overall, brought down by North American numbers.

About increasing sales, new CEO Patrik Frisk said: "It takes a strong brand. And we've been a very quiet brand for the past few years." He then detailed what he described as the most comprehensive branding plan in the company's history, covering digital, storefront, grassroots, and the sporting arenas, with the customer at the center of the movement.

Athlete weightlifting.

Image source: Under Armour.

Taking a stance against pursuing a trend

Analysts have criticized the company for not getting on board with the athleisure trends currently benefitting Nike (NKE 4.55%) and lululemon athletica (LULU 2.46%), but Under Armour is taking a firm and principled stance against that. Frisk said: "There are those who believe our focus on athletic performance may currently be too narrow. We disagree. We see an even greater opportunity to drive harder toward our vision and mission."

This will either be Under Armour's savior or its end and only time will tell. However, it definitely places the company in a niche space and gives it the opportunity to execute on a very specific plan, as opposed to just being another name in an industry. To listen to the naysayers would be to pit itself more squarely against Nike and Lululemon, and why do that? This approach gives customers another reason to take a new look at niche-focused Under Armour.

Already on track

In some ways, the company's restructuring efforts, which began in 2017, are bearing fruit. Operational efficiencies are kicking in, resulting in greater profit margins, better inventory control, and an increase in North American sales.

Under Armour saw encouraging signs with its North American company-owned brick-and-mortar stores, which are currently a small part of its DTC efforts. It's been toning down promotional activity, which it cautions may cause short-term declines for the sake of improving position and benefiting long term from those changes. However, these are minor successes considering the broader picture of where the company's heading.

Frisk outlined four keys to achieving company objectives this year:

  • Positioning segmented products through innovation to drive customer interest.
  • Developing the brand through customer intelligence and marketing efforts, specifically brand ambassadors.
  • Improving operationally to offer a better product.
  • Improving all around as a company to present the customer with a better experience.

Challenges still in the way

One major challenge for Under Armour is increased expense as it attempts to turn itself around. Restructuring in 2020 is expected to cost the company nearly $325 million to $425 million, about $225 million of which comes from scrapping plans to build a New York flagship store at the former site of FAO Schwartz on Fifth Avenue.

It's also still having issues developing a strong digital direct-to-consumer business because customers are reluctant to pay full price coming off so many promotions. Under Armour has not yet changed its image, so the sales aren't pouring in as anticipated. Management is working on a new platform to enhance online community building and overall digital experience to drive engagement. 

Full-year outlook

While the fourth quarter itself showed improvements in many areas, the 2020 outlook was far from confidence-inspiring. Under Armour is expected to have "a mid- to high single-digit decline in North America and low double-digit growth in our international business," and for the first quarter 2020, it's expecting to see revenue decrease 13% to 15%, partially due to declines in China created by the novel coronavirus outbreak.

On the positive side, gross margin is expected to increase 30 to 50 basis points year over year due to supply chain benefits. Operating income is expected to reach $105 million to $125 million, and diluted EPS is expected to be somewhere between $0.10 and $0.13.

Specifically in North America, Frisk admitted that expenses are weighing more heavily than anticipated because sales haven't increased at the expected rate. This puts the company in a compromised position, because it wants to execute according to its plan, but lower demand is making that difficult.

Frisk noted that there are only 19 regular-price Under Armour stores, and Under Armour is looking to open three more this year, but it's "being prudent about that expansion." There's a huge business and potential for a great turnaround if done properly. Will this result in improved sales and value for investors? Only time will tell, but for those willing to take the risk, it's a great time to buy the stock at a low.



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Stocks Mentioned

Under Armour, Inc. Stock Quote
Under Armour, Inc.
UAA
$9.58 (5.39%) $0.49
Under Armour, Inc. Stock Quote
Under Armour, Inc.
UA
$8.39 (2.19%) $0.18
Lululemon Athletica Inc. Stock Quote
Lululemon Athletica Inc.
LULU
$293.36 (2.46%) $7.03
NIKE, Inc. Stock Quote
NIKE, Inc.
NKE
$112.91 (4.55%) $4.91

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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