Under Armour Q4 Earnings: Stocks Plummet On Dismal Performance

by Trefis Team
Under Armour
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Under Armour (NYSE:UA) posted quite a disappointing quarter this time around with earnings and revenue figures missing analyst estimates by quite a margin. A weak apparel market in the U.S. forced the company’s top line down significantly in the quarter. Furthermore, the company has guided towards a weaker revenue outlook for 2017 as the company continues to witness a slowdown in operations globally. To add fuel to an already raging fire, the company’s CFO, Chip Malloy, decided to step down for “personal reasons” after less than a year in office. Following the discouraging earnings call, the sports apparel giant’s stock fell by over 25% upon trading.

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What Changed From October To Now?

Previously, in October, Plank had reiterated that revenue growth in 2017 and 2018 would be in the low 20% range – its slowest growth since 2009, but enough to meet its target of $7.5 billion in total sales by 2018. That said, Plank went on to say that earnings would fall short of its $800 million target by quite a bit as the company continues to vie for long term growth over short term gains. This news sent investors into a panic that triggered a massive sell off of the stock. However, the latest earnings release seems to have pushed things from bad to worse. The management now expects revenues to grow only in the 11-12% range for the coming year, almost half of what was expected by the company three months ago.

In the fourth quarter, volumes were hurt on the back of a dismal apparel industry. Slower traffic forced the company to run its promotional activities earlier on in an attempt to boost sales. This, consequently, commoditised some of the more basic core products that had previously sold through over the years. Additionally, higher demand for more lifestyle products left Under Armour out of balance with their assortment.

Despite this, Under Armour continues to vie for long-term opportunity, opposing short-term gains at the expense of continued growth. From the prepared statements in the earnings call, it is evident that the management is not willing to make any short-term moves, like cutting marketing or R&D spend, in an attempt to reach short-term profit goals. In actuality, such a strategy could greatly impact the company’s long-term prospects, particularly when it comes to growing its international business and footwear categories. These are areas where the company has invested heavily in order to gain market share and scale. Jeopardising growth in these businesses could have severely detrimental effects on the overall business.

Focus On International Markets Is Key 

The company posted $1.3 billion in revenues this quarter, falling short of the analyst estimates of $1.4 billion. As mentioned previously, the lower-than-expected sales figures are the result of a slowing apparel market in the U.S. And since almost 85% of the total revenues come from North America, the lower outlook is a point of immediate concern. Since the apparel industry in the U.S. is expected to continue its slump in the short term, Under Armour must focus heavily on international markets to mitigate its losses at home.

As mentioned previously, Under Armour had stated that it expects to increase sales to about $7.5 billion by 2018. Considering the present current levels, this figure may just be out of reach for the company now. That said, overseas sales have increase by about 50% from 2014. A potential bright side for the company is focusing sales efforts on the international community, resembling its closest competitors in strategy. This is a key market for Under Armour to focus efforts on, and can bring very strong sales numbers in the future.

The growing middle class in emerging markets is expected to present a very strong opportunity for the company going forward. To put this into perspective, the global middle-class demographic consists of almost 3 billion people. In 2015, this demographic spent close to $33 trillion, representing close to two-thirds of the global consumer spending, meaning markets like China are expected to drive revenues significantly in the future.

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