Under Armour stock: Shares plunge 17% on grim forecast

So much for Under Armour switching to offense.

The sports apparel and footwear brand warned investors on Wall Street on Tuesday to expect revenue to decline sharply this year in North America, by far its biggest market, in a forecast that reignited fears about the prospects for Under Armour’s turnaround. Shares plummeted 17%.

Under Armour expects revenue to fall by a mid- to high-single-digit percentage in North America in 2020, continuing the deterioration of a business that has become too reliant on discounting, hurt by an e-commerce site not up to today’s technology standards, and a brand that has fallen out of favor with many customers.

“Our transformation is taking longer than we had originally expected,” newly minted chief executive Patrik Frisk conceded to analysts on a conference call. He blamed a number of factors, including what he euphemistically called “ongoing demand challenges.”

Adding to its woes, Under Armour said it expects the coronavirus outbreak in China to dent sales by approximately $50 million to $60 million in the first quarter of 2020.

Only three months ago, when Under Armour announced founder Kevin Plank would step down as CEO and hand the reins to Frisk on January 1, the company spoke of finally going on offense after a few years of fixing its business.

But on Tuesday, it said it may undertake a highly defensive move: it is considering another company restructure for 2020 that would imply between $325 million and $425 million in charges. What’s more, Under Armour is considering abandoning plans to open a flagship store in New York City just a few blocks away from Nike’s massive emporium on Fifth Avenue given the expense, in what would be a symbolically tough concession to reality.

The company has made strides on some fronts in the last three years. It has improved operationally and become more disciplined about factors such as costs and inventory better aligned with sales levels. For the full year in 2019, Under Armour returned to profit, posting a net income of $92.1 million on revenue of $5.3 billion, after reporting a loss the year before.

But operational strength can only help so much if consumer interest in a brand and its products wanes.

Under Armour has been hurting since 2017, when a 26-quarter streak of revenue growth of 20% or more came to a halt, outmaneuvered by rivals like Nike, Lululemon Athletica and Adidas, that deftly jumped on the athleisure trend emphasizing fashion and casual clothing, and the emergence of a crop of new contenders such as Vuori, Rabbit, and Tracksmith.

Still, Frisk again insisted on Tuesday that Under Armour’s path to prosperity continues to focus on the technical aspects of clothing, which are the company’s foundation. Plank founded Under Armour in 1996, and its first product was a sweat-wicking shirt for football players he made in his grandmother’s basement.

“We are committed to staying centered in athletic performance,” he said.

That appears to be costing it some market share. In the 12 months ending last June, NPD Group’s tracking service estimated that Under Armour’s share of the U.S. activewear market had fallen 1.2 percentage points to 5.6%. Some 60% of Under Armour’s revenue comes from wholesale accounts (sales to other retailers). But Wall Street analysts worry that it continues to lose shelf space at some retailers.

“Earning our way back on the shelves at retail is taking longer than we thought it would,” Frisk told the Wall Street analysts.

And years of its products being discounted online or at its outlet stores has dented Under Armour’s “premium” aura, and as Frisk put it, “impacted consumers’ willingness to pay full price for our brand to a higher degree than we originally anticipated.”

But as the cases of Coach, Ralph Lauren and Michael Kors in the last decade have shown, it can take years for a brand to wean shoppers off of discounts, if it even does, including a long period of sales declines.

Under Armour shares plunge 17% on grim forecast

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