The bar was set low for Under Armour's (UA +4.26%) (UAA +4.67%) fourth-quarter earnings results, but investors were still shocked to see the sports apparel titan's latest operating and financial trends. Weak sales growth translated into more market-share losses over the holiday shopping period. The struggles aren't expected to go away soon, either, as the company projected another tough transition year in 2020.
In a conference call with Wall Street analysts, CEO Patrik Frisk and his team explained the main factors behind the operating slump and what Under Armour plans to do to turn the business around over the next year.
Let's look at a few highlights from that presentation.
Image source: Getty Images.
Not good enough
On my first call as CEO, I'll start by underscoring ... I'm not satisfied with where we are today. -- Frisk
The main big-picture problems, as Frisk sees them, are weak demand and a burdensome cost structure. The expense challenge is more easily fixed, although that restructuring is taking more time than management had hoped it would. Net loss over the holiday season was $15 million, after all, as selling expenses ticked up to 42.4% of sales from 42%.
Fixing demand is a taller order since it involves elevating the portfolio of footwear and apparel products to compete alongside full-price performance peers such as Nike (NKE +2.02%) rather than on discount shelves.
This past year's 3% revenue increase -- compared to Nike's 11% spike -- illustrates the scope of that innovation challenge. "We've been a very quiet brand for the past few years," Frisk admitted as he noted that retailers have lowered their allocation to its products.
Platform problems
We're working to improve our e-commerce platform to better compete in today's ever-changing, highly competitive market. -- Frisk
In addition to the core product challenge, Under Armour is seeing weakness in its e-commerce selling platform. That channel has been critical to Nike's growth in recent quarters, including by soaring 38% last quarter. It was roughly flat at Under Armour.
Look for the company to pour cash into its digital shopping services, which executives hope will lift engagement while supporting more frequent purchasing. "There's a tremendous opportunity to right this business," Frisk said, "and we're not sitting idly by."
More than just tweaks
We are assessing a potential 2020 restructuring plan which could include approximately $325 million to $425 million of pre-tax restructuring-related charges. -- CFO David Bergman
Under Armour is changing its approach to the restructuring it has tried to implement since 2017. Those initiatives haven't solved the core demand or profitability challenges, so the company is going bigger, with potentially over $400 million in charges expected this year.
It's the consumer retailing specialist's biggest turnaround effort to date, and its main goals are to boost the brand so that consumers buy its products online and retailers are proud to allocate plenty of shelf space to the merchandise, too. Thus, investors can follow metrics such as core sales gains and gross profit margin to judge the rebound's success.
Yet, the forecast calling for lower U.S. sales this year implies that it likely won't be until at least 2021 that the comprehensive reboot starts delivering faster revenue growth for the business.
