Under Armour, Inc. (NYSE: UA, UAA) today announced financial results for the fourth quarter ended December 31, 2018. The company reports its financial performance in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
This press release refers to “currency neutral” and “adjusted” amounts, which are non-GAAP financial measures described below under the “Non-GAAP Financial Information” paragraph. References to adjusted financial measures exclude the impact of the company’s restructuring plans and the related tax effects, as well as adjustments to our one-time impacts of the 2017 U.S. tax reform legislation, which we refer to as the U.S. Tax Act. Reconciliations of non-GAAP amounts to the most directly comparable financial measure calculated in accordance with GAAP are presented in supplemental financial information furnished with this release. All per share amounts are reported on a diluted basis.
“Our 2018 results demonstrate significant progress against our multi-year transformation toward becoming an even stronger brand and more operationally excellent company,” said Under Armour Chairman and CEO Kevin Plank. “As we look ahead to 2019, our accelerated innovation agenda, disciplined go-to-market process and powerful consumer-centric approach gives us increasingly greater confidence in our ability to deliver for Under Armour athletes, customers and shareholders.”
Fourth Quarter 2018 Review
• Revenue was up 2 % to USD 1.4 billion (up 3 percent currency neutral).
o Wholesale revenue increased 1 percent to USD 737 million and direct-to-consumer revenue was flat at USD 577 million, representing 41 % of total revenue.
o North America revenue decreased 6 percent to USD 965 million and our international business increased 24 % to USD 395 million (up 28 percent currency neutral), representing 28 % of total revenue. Within the international business, revenue was up 32 % in EMEA (up 35 percent currency neutral), up 35 % in Asia-Pacific (up 39 % currency neutral), and down 15 % in Latin America (down 11 % currency neutral).
o Apparel revenue increased 2 percent to USD 970 million with growth in the train category. Footwear revenue decreased 4 % to USD 235 million primarily driven by lower sales to the off-price channel. Accessories revenue decreased 2 % to USD 108 million.
• Gross margin increased 160 basis points to 45.0 % compared to the prior year, including a USD 2 million impact related to restructuring efforts. Excluding restructuring efforts in both periods, adjusted gross margin increased 160 basis points to 45.1 % compared to the prior year driven predominantly by regional and channel mix, product cost improvements, lower promotional activity, and lower air freight partially offset by changes in foreign currency.
• Selling, general & administrative expenses decreased 1 % to USD 587 million, or 42.3 % of revenue.
• Restructuring and impairment charges were USD 48 million.
• Operating loss was USD 10 million. Adjusted operating income was USD 40 million.
• Net income was USD 4 million or USD 0.01 earnings per share. Adjusted net income was USD 42 million or USD 0.09 adjusted earnings per share.
• Inventory decreased 12 % to USD 1.0 billion.
• Cash and cash equivalents increased 78 % to USD 557 million.
Full Year 2018 Review
• Revenue was up 4 % to USD 5.2 billion.
o Wholesale revenue increased 3 % to USD 3.1 billion and direct-to-consumer revenue was up 4 % to USD 1.8 billion, representing 35 percent of total revenue.
o North America revenue decreased 2 % to USD 3.7 billion and our international business increased 23 % to USD 1.3 billion (up 22 percent currency neutral), representing 26 % of total revenue. Within the international business, revenue was up 25 % in EMEA (up 23 % currency neutral), up 29 % in Asia-Pacific (up 27 % currency neutral), and up 5 % in Latin America (up 8 % currency neutral).
o Apparel revenue increased 5 % to USD 3.5 billion with growth primarily driven by the train category. Footwear revenue increased 2 % to USD 1.1 billion largely driven by growth in the run category. Accessories revenue was down 5 percent to USD 422 million due to softer demand and continued actions to optimize our inventory and distribution.
• Gross margin was 45.1 %, in line with the prior year including a USD 21 million impact related to restructuring efforts. Excluding restructuring efforts in both periods, adjusted gross margin increased 30 basis points to 45.5 % driven predominantly by product cost improvements, lower promotional activity, and changes in foreign currency offset by channel mix.
• Selling, general & administrative expenses increased 4 % to USD 2.2 billion, or 42.0 % of revenue.
• Restructuring and impairment charges were USD 183 million.
• Operating loss was USD 25 million. Adjusted operating income was USD 179 million.
• Net loss was USD 46 million or USD 0.10 loss per share. Adjusted net income was USD 122 million or USD 0.27 adjusted earnings per share.
2018 Restructuring Plan
For the full year the company recognized USD 204 million of pre-tax charges, inclusive of USD 50 million in the fourth quarter. Of the USD 204 million recognized, there were USD 151 million in cash related charges and USD 53 million in non-cash related charges. This compares to the previously announced 2018 plan which anticipated approximately USD 200 to USD 220 million in restructuring related charges for the full year.
Full Year 2019 Outlook
There are no changes to the company’s 2019 outlook, which was provided at its December 12, 2018 investor day:
• Revenue is expected to increase approximately 3 to 4 % reflecting relatively flat results for North America and a low double-digit percentage rate increase in the international business.
• Gross margin is expected to improve approximately 60 to 80 basis points compared to 2018 adjusted gross margin due to channel mix benefits from lower planned sales to the off-price channel and a higher percentage of direct-to-consumer sales along with more favourable product costs due to ongoing supply chain initiatives.
• Operating income is expected to reach USD 210 million to USD 230 million.
• Interest and other expense net is planned at approximately USD 40 million.
• Effective tax rate is expected to be in the 19 % to 22 % range.
• Earnings per share is expected to be in the range of USD 0.31 to USD 0.33; and,
• Capital expenditures are planned at approximately USD 210 million.X
Under Armour, Inc., headquartered in Baltimore, Maryland, is a leading inventor, marketer and distributor of branded performance athletic apparel, footwear and accessories. Designed to make all athletes better, the brand’s innovative products are sold worldwide to consumers with active lifestyles. The company’s Connected Fitness™ platform powers the world’s largest digitally connected health and fitness community.
Comment by guest author Elizabeth Winkler from Wall Street Journal:
Under Armour’s Never-Ending Story
The sportswear company’s reset, promised since 2017, has yet to take hold
Under Armour’s turnaround plan is looking like the plan that will never end.
On Tuesday, January 12, 2019, the sportswear company reported fourth-quarter earnings of 9 cents a share and revenue of USD 1.39 billion. Both slightly exceeded analysts’ estimates, but those were based on a sharply lowered outlook that Under Armour issued in December.
The company keeps promising meaningful growth to come in its core North American business and in sectors such as footwear and womenswear, but there are few signs of delivering.
U.S. sales for the quarter fell 6% from the same period a year before. That is a deterioration compared with the fourth quarter of 2017 when they fell 4.5 %. Footwear sales were down 4%. International sales, which now account for 28 % of total revenue, provided a brighter spot, climbing 28 %.
Investors sent the stock up in morning trading Tuesday. They would do best not to get prematurely optimistic. Under Armour has been updating its “restructuring plan” since it was first announced in the summer of 2017. Chief Executive Kevin Plank said then that 2017 was a “reset” for the business and the brand as it tried to address persistent problems such as slowing revenue growth and churn in its offices. But Under Armour keeps extending that reset.
The company is maintaining the 2019 fiscal outlook it announced in December, calling for sales in North America to be flat and overall sales to be up 3 % to 4 %. It may be able to meet that, given the lowered bar. But even reaching flat sales in North America looks like a stretch when they have fallen in four of the past five quarters.
Investors shouldn’t be surprised if the time horizon lengthens and the outlook for 2019 gets further downgraded. For a company built on the concept of performance, Under Armour is conspicuously lacking.