The good news from Under Armour (UAA) on Tuesday was that it is getting a better handle on inventory levels, and by extension, protecting profit margins.
The bad news is that sales in North America—its biggest market by far, generating about 71% of Under Armour’s total business—continued to fall in the fourth quarter, as the sports gear maker reins in discounting and is more selective about what it sells and where, slipping 6% in the quarter ended December 31. That was a deeper fall than Under Armour’s declines in recent quarters, and a dismal performance compared to Nike (NKE), where it rose 9% in its most recent quarter, one that ended November 30.
But the North American results stem from the tough medicine Under Armour has been taking to right its business. Under a restructuring plan unveiled in 2017, which it has tweaked a few times, Under Armour has sought to restructure operations to rein in costs, keep leaner inventories and speed up its time to product to adjust more quickly to demand, and rein in margin-harming discounts.
And on that front, Under Armour has scored some points: In the fourth quarter, gross margin profit rose 1.6 percentage points to 45% of sales, helping it return to profit. The company posted a net income of $4.2 million for the quarter, compared to an $88 million loss a year earlier. Total sales during the quarter rose 1.5% to $1.39 billion, lifted by big gains in Europe and Asia that offset weakness at home.
But Under Armour faces a top line problem, much more than a bottom line one. And its troubles reside firmly at home. The company expects sales in North America to be unchanged to up as much as 4% this year, still tepid. But that won’t be easy, considering its current trends, and the strong growth at Nike and Adidas, not to mention the ongoing success of Lululemon Athleta in athletic gear. (LULU)
Under Armour CEO Kevin Plank made it clear to analysts that in his mind, the path to success will be to focus on the technical aspects of its gear that enhance an athlete’s performance, the original raison d’être of the brand, rather than becoming a pale version of any rival.
“Weakness for us today is actually going to be our greatest strength,” he told Wall Street analysts. “The world doesn’t need another version of a brand that may be working today.” Under Armour shares rose 5%, showing the renewed faith investors are starting to develop. Then again, at $21, shares are barely one-fifth where they were four years ago, confirming the tough slog ahead for Under Armour.